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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended March 31, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission File Number 0-23223



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CURAGEN CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 06-1331400                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



555 Long Wharf
Drive, 11th Floor, New Haven, Connecticut 06511

(Address of principal executive offices) (Zip Code)



Registrants telephone number, including area code: (203) 401-3330



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act)    Yes  x    No ̈



The number of
shares outstanding of the Registrants common stock as of April 29, 2005 was 50,760,142.



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##### Table of Contents

CURAGEN CORPORATION AND SUBSIDIARY

FORM 10-Q

INDEX



|                              |  |         |  |                                                                                                                |  |        
|----------------------------- |  | ------- |  | -------------------------------------------------------------------------------------------------------------- |  | -------
|                              |  |         |  |                                                                                                                |  | Page   
|PART I. Financial Information |  |        
|                              |  |         | 
|                              |  | Item 1. |  | Financial Statements                                                                                           |  |        
|                              |  |         | 
|                              |  |         |  | Condensed Consolidated Balance Sheets,March 31, 2005 (unaudited) and December 31, 2004                         |  | 3      
|                              |  |         | 
|                              |  |         |  | Condensed Consolidated Statements of Operations,for the Three Months Ended March 31, 2005 and 2004 (unaudited) |  | 4      
|                              |  |         | 
|                              |  |         |  | Condensed Consolidated Statements of Cash Flows,for the Three Months Ended March 31, 2005 and 2004 (unaudited) |  | 5      
|                              |  |         | 
|                              |  |         |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                               |  | 6 - 9  
|                              |  |         | 
|                              |  | Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                          |  | 10 - 33
|                              |  |         | 
|                              |  | Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                     |  | 33     
|                              |  |         | 
|                              |  | Item 4. |  | Controls and Procedures                                                                                        |  | 34     
|                              | 
|PART II. Other Information    |  |        
|                              |  |         | 
|                              |  | Item 6. |  | Exhibits                                                                                                       |  | 35     
|                              | 
|Signatures                    |  | 36     
|                              | 
|Exhibit Index                 |  | 37     



2



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CURAGEN CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)



|                                                                                                                                     |  |               |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                     |  | March 31,2005 |          |   | December 31,2004 |  
|                                                                                                                                     |  | (unaudited)   |          |   |                  |  
|ASSETS                                                                                                                               |  |               |          |   |                  |   |          |  
|Current assets:                                                                                                                      |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                            |  | $             | 26,317   |   |                  | $ | 23,849   |  
|Short-term investments                                                                                                               |  |               | 59,323   |   |                  |   | 83,921   |  
|Marketable securities                                                                                                                |  |               | 217,767  |   |                  |   | 220,350  |  
|                                                                                                                                     |  |               |          |   |                  |   |          |  
|Cash and investments                                                                                                                 |  |               | 303,407  |   |                  |   | 328,120  |  
|Income taxes receivable                                                                                                              |  |               | 902      |   |                  |   | 829      |  
|Inventory                                                                                                                            |  |               | 1,429    |   |                  |   |         |  
|Accounts receivable                                                                                                                  |  |               | 1,330    |   |                  |   | 234      |  
|Other current assets                                                                                                                 |  |               | 3        |   |                  |   | 64       |  
|Prepaid expenses                                                                                                                     |  |               | 1,516    |   |                  |   | 1,499    |  
|                                                                                                                                     |  |               |          |   |                  |   |          |  
|Total current assets                                                                                                                 |  |               | 308,587  |   |                  |   | 330,746  |  
|Property and equipment, net                                                                                                          |  |               | 26,343   |   |                  |   | 24,132   |  
|Intangible and other assets, net                                                                                                     |  |               | 13,817   |   |                  |   | 14,334   |  
|                                                                                                                                     |  |               |          |   |                  |   |          |  
|Total assets                                                                                                                         |  | $             | 348,747  |   |                  | $ | 369,212  |  
|                                                                                                                                     |  |               |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                 |  |               |          |   |                  |   |          |  
|Current liabilities:                                                                                                                 |  |               |          |   |                  |   |          |  
|Accounts payable                                                                                                                     |  | $             | 3,764    |   |                  | $ | 1,840    |  
|Accrued expenses                                                                                                                     |  |               | 6,408    |   |                  |   | 4,143    |  
|Accrued payroll and related items                                                                                                    |  |               | 1,245    |   |                  |   | 2,075    |  
|Interest payable                                                                                                                     |  |               | 1,850    |   |                  |   | 4,900    |  
|Deferred revenue                                                                                                                     |  |               | 5,030    |   |                  |   | 4,244    |  
|Other current liabilities                                                                                                            |  |               | 1,053    |   |                  |   | 1,520    |  
|                                                                                                                                     |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                                                            |  |               | 19,350   |   |                  |   | 18,722   |  
|                                                                                                                                     |  |               |          |   |                  |   |          |  
|Long-term liabilities:                                                                                                               |  |               |          |   |                  |   |          |  
|Convertible subordinated debt                                                                                                        |  |               | 240,000  |   |                  |   | 240,000  |  
|Accrued long-term liabilities                                                                                                        |  |               | 1,000    |   |                  |   | 1,000    |  
|                                                                                                                                     |  |               |          |   |                  |   |          |  
|Total long-term liabilities                                                                                                          |  |               | 241,000  |   |                  |   | 241,000  |  
|                                                                                                                                     |  |               |          |   |                  |   |          |  
|Commitments and contingencies                                                                                                        |  |               |          |   |                  |   |          |  
|                                                                                                                                     |  |              
|Minority interest in subsidiary                                                                                                      |  |               | 1,726    |   |                  |   | 2,593    |  
|                                                                                                                                     |  |               |          |   |                  |   |          |  
|Stockholders equity:                                                                                                                |  |               |          |   |                  |   |          |  
|Common Stock; $.01 par value, issued and outstanding 50,740,534 shares at March 31, 2005, and 50,646,538 shares at December 31,
2004 |  |               | 507      |   |                  |   | 506      |  
|Additional paid-in capital                                                                                                           |  |               | 490,009  |   |                  |   | 489,725  |  
|Accumulated other comprehensive loss                                                                                                 |  |               | (2,632   | ) |                  |   | (1,114   | )
|Accumulated deficit                                                                                                                  |  |               | (399,288 | ) |                  |   | (379,889 | )
|Unamortized stock-based compensation                                                                                                 |  |               | (1,925   | ) |                  |   | (2,331   | )
|                                                                                                                                     |  |               |          |   |                  |   |          |  
|Total stockholders equity                                                                                                           |  |               | 86,671   |   |                  |   | 106,897  |  
|                                                                                                                                     |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                           |  | $             | 348,747  |   |                  | $ | 369,212  |  
|                                                                                                                                     |  |               |          |   |                  |   |          |  



See accompanying notes
to condensed consolidated financial statements



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CURAGEN CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                                                                         |  |                             |         |   |      |   |         |  
|---------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                         |  | Three Months EndedMarch 31, |        
|                                                                                         |  | 2005                        |         |   | 2004 |  
|Revenue:                                                                                 |  |                             |         |   |      |   |         |  
|Grant revenue                                                                            |  | $                           | 719     |   |      |   |        |  
|Instrument and reagent sales                                                             |  |                             | 1,082   |   |      |   |        |  
|Collaboration revenue                                                                    |  |                             | 1,629   |   |      | $ | 1,615   |  
|                                                                                         |  |                             |         |   |      |   |         |  
|Total revenue                                                                            |  |                             | 3,430   |   |      |   | 1,615   |  
|                                                                                         |  |                             |         |   |      |   |         |  
|Operating expenses:                                                                      |  |                             |         |   |      |   |         |  
|Grant research                                                                           |  |                             | 421     |   |      |   |        |  
|Cost of instrument and reagent sales                                                     |  |                             | 207     |   |      |   |        |  
|Research and development                                                                 |  |                             | 17,576  |   |      |   | 15,141  |  
|General and administrative                                                               |  |                             | 4,351   |   |      |   | 4,857   |  
|                                                                                         |  |                             |         |   |      |   |         |  
|Total operating expenses                                                                 |  |                             | 22,555  |   |      |   | 19,998  |  
|                                                                                         |  |                             |         |   |      |   |         |  
|Loss from operations                                                                     |  |                             | (19,125 | ) |      |   | (18,383 | )
|Interest income                                                                          |  |                             | 2,107   |   |      |   | 2,036   |  
|Interest expense                                                                         |  |                             | (3,361  | ) |      |   | (2,877  | )
|Loss on extinguishment of debt                                                           |  |                             |        |   |      |   | (294    | )
|                                                                                         |  |                             |         |   |      |   |         |  
|Loss before income taxes and minority interest in subsidiary loss                        |  |                             | (20,379 | ) |      |   | (19,518 | )
|Income tax benefit                                                                       |  |                             | 73      |   |      |   | 94      |  
|Minority interest in subsidiary loss                                                     |  |                             | 907     |   |      |   | 1,385   |  
|                                                                                         |  |                             |         |   |      |   |         |  
|Net loss                                                                                 |  | $                           | (19,399 | ) |      | $ | (18,039 | )
|                                                                                         |  |                             |         |   |      |   |         |  
|Basic and diluted net loss per share                                                     |  | $                           | (0.39   | ) |      | $ | (0.36   | )
|                                                                                         |  |                             |         |   |      |   |         |  
|Weighted average number of shares used in computing basic and diluted net loss per share |  |                             | 50,272  |   |      |   | 49,803  |  
|                                                                                         |  |                             |         |   |      |   |         |  



See accompanying notes
to condensed consolidated financial statements



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CURAGEN CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                            |  |                             |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                            |  | Three Months EndedMarch 31, |        
|                                                                            |  | 2005                        |         |   | 2004 |  
|Cash flows from operating activities:                                       |  |                             |         |   |      |   |         |  
|Net loss                                                                    |  | $                           | (19,399 | ) |      | $ | (18,039 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                             |         |   |      |   |         |  
|Depreciation and amortization                                               |  |                             | 2,000   |   |      |   | 2,583   |  
|Non-monetary compensation                                                   |  |                             | 318     |   |      |   | 123     |  
|Stock-based 401(k) employer plan match                                      |  |                             | 170     |   |      |   | 244     |  
|Loss on extinguishment of debt                                              |  |                             |        |   |      |   | 294     |  
|Minority interest                                                           |  |                             | (907    | ) |      |   | (1,385  | )
|Changes in assets and liabilities:                                          |  |                             |         |   |      |   |         |  
|Income taxes receivable                                                     |  |                             | (73     | ) |      |   | (94     | )
|Inventory                                                                   |  |                             | (873    | ) |      |   |        |  
|Accounts receivable                                                         |  |                             | (1,096  | ) |      |   |        |  
|Other current assets                                                        |  |                             | 61      |   |      |   | (12     | )
|Prepaid expenses                                                            |  |                             | (17     | ) |      |   | (614    | )
|Intangible and other assets, net                                            |  |                             | (78     | ) |      |   | (22     | )
|Accounts payable                                                            |  |                             | 1,924   |   |      |   | (2,088  | )
|Accrued expenses                                                            |  |                             | 2,265   |   |      |   | 192     |  
|Accrued payroll and related items                                           |  |                             | (830    | ) |      |   | (429    | )
|Interest payable                                                            |  |                             | (3,050  | ) |      |   | (1,901  | )
|Deferred revenue                                                            |  |                             | 786     |   |      |   | (538    | )
|Other current liabilities                                                   |  |                             | (452    | ) |      |   | (251    | )
|                                                                            |  |                             |         |   |      |   |         |  
|Net cash used in operating activities                                       |  |                             | (19,251 | ) |      |   | (21,937 | )
|                                                                            |  |                             |         |   |      |   |         |  
|Cash flows from investing activities:                                       |  |                             |         |   |      |   |         |  
|Acquisitions of property and equipment                                      |  |                             | (4,281  | ) |      |   | (999    | )
|Proceeds from sale of fixed assets                                          |  |                             | 114     |   |      |   |        |  
|Payments for intangible assets                                              |  |                             | (5      | ) |      |   | (140    | )
|Loans to employees, net of repayments                                       |  |                             |        |   |      |   | (42     | )
|Net inflows from purchases and maturities of short-term investments         |  |                             | 24,579  |   |      |   | 42,206  |  
|Net inflows from purchases and maturities of marketable securities          |  |                             | 1,084   |   |      |   | 5,053   |  
|                                                                            |  |                             |         |   |      |   |         |  
|Net cash provided by investing activities                                   |  |                             | 21,491  |   |      |   | 46,078  |  
|                                                                            |  |                             |         |   |      |   |         |  
|Cash flows from financing activities:                                       |  |                             |         |   |      |   |         |  
|Payments on capital lease obligations                                       |  |                             |        |   |      |   | (147    | )
|Proceeds from exercise of stock options                                     |  |                             | 228     |   |      |   | 210     |  
|Proceeds from issuance of convertible debt                                  |  |                             |        |   |      |   | 110,000 |  
|Payment for extinguishment of debt                                          |  |                             |        |   |      |   | (20,000 | )
|Payment of financing costs                                                  |  |                             |        |   |      |   | (3,719  | )
|                                                                            |  |                             |         |   |      |   |         |  
|Net cash provided by financing activities                                   |  |                             | 228     |   |      |   | 86,344  |  
|                                                                            |  |                             |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                   |  |                             | 2,468   |   |      |   | 110,485 |  
|Cash and cash equivalents, beginning of period                              |  |                             | 23,849  |   |      |   | 42,843  |  
|                                                                            |  |                             |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                    |  | $                           | 26,317  |   |      | $ | 153,328 |  
|                                                                            |  |                             |         |   |      |   |         |  
|Supplemental cash flow information:                                         |  |                             |         |   |      |   |         |  
|Interest paid                                                               |  | $                           | 6,116   |   |      | $ | 4,561   |  



See accompanying notes
to condensed consolidated financial statements



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CURAGEN CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



|1. | Basis of Presentation
|-- | ---------------------



The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of our management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting
of only normal recurring accruals, necessary to present fairly our consolidated financial position, results of operations and cash flows. Interim results are not necessarily indicative of the results that may be expected for the entire year. The
condensed consolidated financial statements of CuraGen Corporation and subsidiary (the Company) include CuraGen Corporation (CuraGen) and its majority-owned subsidiary, 454 Life Sciences Corporation (454), and
accordingly, all material intercompany balances and transactions have been eliminated.



The December 31, 2004 condensed consolidated financial statements have been reclassified to conform to the classifications used in 2005.
All dollar amounts are shown in thousands, except par value and per share data.



The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004.



|2. | Significant Accounting Policy
|-- | -----------------------------



Due to the commercialization of 454s novel nanoscale instrumentation and reagent products for whole genome sequencing during the
quarter ended March 31, 2005, 454 adopted the following significant accounting policy:



Revenue Recognition, Instrument and Reagent Sales454 recognizes revenue when (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services have been rendered; (3) the price is fixed or determinable and, (4) the collectibility is reasonably assured, in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104,
Revenue Recognition. Instrument sales are recognized upon the completion of installation of the equipment and training of customer personnel. However, certain customers have required that an instrument be tested prior to accepting the
instrument. For those customers, revenue is recognized upon acknowledgement of acceptance from the customer. Reagent sales are recognized upon shipment of the products under FOB shipping or FOB destination based upon terms and conditions outlined in
454 customers purchase orders.



|3. | Comprehensive Loss
|-- | ------------------



Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130), requires reporting
and displaying of comprehensive income and its components. In accordance with SFAS 130, the accumulated balance of other comprehensive loss is disclosed as a separate component of stockholders equity and is comprised of unrealized gains and
losses on short-term investments and marketable securities. A summary of total comprehensive loss is as follows:



|                                                            |  |                             |         |   |      |   |         |  
|----------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                            |  | Three Months EndedMarch 31, |        
|                                                            |  | 2005                        |         |   | 2004 |  
|Net loss                                                    |  | $                           | (19,399 | ) |      | $ | (18,039 | )
|                                                            |  |                             |         |   |      |   |         |  
|Other comprehensive loss:                                   |  |                             |         |   |      |   |         |  
|Unrealized (losses) gains on securities:                    |  |                             |         |   |      |   |         |  
|Unrealized holding (losses) gains arising during period     |  |                             | (1,549  | ) |      |   | 865     |  
|Reclassification adjustment for losses included in net loss |  |                             | 31      |   |      |   | 138     |  
|                                                            |  |                             |         |   |      |   |         |  
|Net unrealized (losses) gains on securities                 |  |                             | (1,518  | ) |      |   | 727     |  
|                                                            |  |                             |         |   |      |   |         |  
|Total comprehensive loss                                    |  | $                           | (20,917 | ) |      | $ | (17,312 | )
|                                                            |  |                             |         |   |      |   |         |  



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The Company periodically reviews its investment portfolio to determine if there is an
impairment that is other than temporary, and to date, has not experienced any impairments in its investments that were other than temporary. The Companys investment objectives for cash equivalents, short term investments and marketable
securities (the investment portfolio) is to preserve capital while maintaining liquidity and generating favorable yields within the limitations of the investment guidelines outlined in the Companys and 454s investment
policies. These investment policies provide guidelines for sector diversification, maximum maturity and duration, concentration limits and credit quality. These policies also outline unacceptable investments.



In evaluating whether the individual investments in the
investment portfolio are not other than temporarily impaired, the Company considered the credit rating of the individual securities, the cause of the impairment of the individual securities which are primarily related to interest rate increases and
the severity of the impairment of the individual securities which are all less than 5% of the book value of the security.



|4. | Stock-Based Compensation
|-- | ------------------------



Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), requires
expanded disclosures of stock-based compensation arrangements with employees and non-employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instruments awarded to employees. Companies
are permitted to continue to apply Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), which recognizes compensation cost based on the intrinsic value of the equity instruments
awarded. The Company will continue to apply APB 25 to its stock-based compensation awards to employees through December 31, 2005. Effective January 1, 2006, the Company will apply the provisions of Statement of Financial Accounting Standards No.
123R Share-Based Payment (SFAS 123R) issued in December 2004.



Had compensation cost for the Companys stock option plans been determined in accordance with SFAS 123, the Companys net loss
and net loss per share would have approximated the pro forma amounts shown below for each of the three month periods ended March 31, 2005 and 2004. The pro forma disclosure may not be indicative of pro forma results in future periods, because of the
fact that options vest over several years, pro forma compensation expense is recognized as the options vest and additional awards may also be granted. The three month period ended March 31, 2004 pro forma expense and net loss disclosures below have
been adjusted to reflect differences discovered during the preparation of the 2004 pro forma disclosures.



|                                                                                                    |  |                             |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                    |  | Three Months EndedMarch 31, |        
|                                                                                                    |  | 2005                        |         |   | 2004 |  
|Net loss, as reported                                                                               |  | $                           | (19,399 | ) |      | $ | (18,039 | )
|Stock-based employee compensation expense included in net loss                                      |  |                             | 313     |   |      |   | 97      |  
|Total stock-based employee compensation expense determined under Black-Scholes option pricing model |  |                             | (1,255  | ) |      |   | (759    | )
|                                                                                                    |  |                             |         |   |      |   |         |  
|Pro forma net loss                                                                                  |  | $                           | (20,341 | ) |      | $ | (18,701 | )
|                                                                                                    |  |                             |         |   |      |   |         |  
|Basic and diluted net loss per share:                                                               |  |                             |         |   |      |   |         |  
|As reported                                                                                         |  | $                           | (0.39   | ) |      | $ | (0.36   | )
|Pro forma                                                                                           |  | $                           | (0.40   | ) |      | $ | (0.38   | )



The
fair value of options granted during the three months ended March 31, 2005 and 2004 was estimated as of the grant date using the Black-Scholes option-pricing model with the following assumptions:



|                                          |  |                              |   |  |      |  
|----------------------------------------- |  | ---------------------------- | - |  | ---- | -
|                                          |  | Three Months Ended March 31, |  
|                                          |  | 2005                         |   |  | 2004 |  
|Expected dividend yield                   |  | 0                            | % |  | 0    | %
|Expected stock price volatility - CuraGen |  | 82                           | % |  | 82   | %
|Expected stock price volatility - 454     |  | .10                          | % |  | .10  | %
|Risk-free interest rate - CuraGen         |  | 3.43                         | % |  | 3.65 | %
|Risk-free interest rate - 454             |  | 3.87                         | % |  | 3.65 | %
|Expected option term in years - CuraGen   |  | 4.6                          |   |  | 6.1  |  
|Expected option term in years - 454       |  | 7.8                          |   |  | 8.0  |  



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|5. | Restructuring and Related Charges
|-- | ---------------------------------



In June 2003, the Company announced a restructuring plan intended to focus resources on continuing to advance its pipeline of protein,
antibody, and small molecule therapeutics into preclinical and clinical development. In connection with this restructuring plan, a charge of $2,888 was recorded in the second quarter of 2003, including $1,742 related to employee separation costs,
$1,046 of operating lease obligations and $100 of asset impairment costs. The cash requirements under the June 2003 restructuring plan were $2,681, of which $2,227 was paid prior to March 31, 2005. The remaining cash requirements of $454 will be
paid through 2006.



In October 2004, the
Company announced a corporate restructuring to focus on advancing its therapeutic pipeline through clinical development. In connection with the October 2004 restructuring plan, a charge of $4,000 was recorded in the fourth quarter of 2004, including
$2,968 related to employee separation costs, and $1,032 of asset impairment costs. The cash requirements under the October 2004 restructuring plan were $2,750, of which $2,561 was paid prior to March 31, 2005. The remaining cash requirements of $189
will be paid through June 2005.



|6. | Segment Reporting
|-- | -----------------



The Company currently operates in two business segments: CuraGen and 454. CuraGen is a genomics-based pharmaceutical development company
dedicated to improving the lives of patients by developing novel protein, antibody and small molecule therapeutics in the areas of oncology, inflammatory diseases, and diabetes. 454, the Companys majority-owned subsidiary, is commercializing
novel nanoscale instrumentation and technologies for rapidly and comprehensively determining the nucleotide sequence of entire genomes (whole genome sequencing). The operations of 454 are run by a separate management team and governed by
a separate Board of Directors made up of members of CuraGens management team and Board of Directors. The Company currently exceeds the quantitative thresholds governing segment reporting, and as a result, the financial information disclosed
herein represents all of the material financial information related to the Companys reportable business segments. All of the Companys revenues are generated in the United States and all assets are located in the United States.



|                                     |  |                              |         |   |                  |   |         |  
|------------------------------------ |  | ---------------------------- | ------- | - | ---------------- | - | ------- | -
|                                     |  | March 31,2005                |         |   | December 31,2004 |  
|Cash and investments:                |  |                              |         |   |                  |   |         |  
|CuraGen                              |  | $                            | 298,521 |   |                  | $ | 320,296 |  
|454                                  |  |                              | 4,886   |   |                  |   | 7,824   |  
|                                     |  |                              |         |   |                  |   |         |  
|Total                                |  | $                            | 303,407 |   |                  | $ | 328,120 |  
|                                     |  |                              |         |   |                  |   |         |  
|Total assets:                        |  |                              |         |   |                  |   |         |  
|CuraGen                              |  | $                            | 343,416 |   |                  | $ | 364,385 |  
|454                                  |  |                              | 14,903  |   |                  |   | 16,231  |  
|Intercompany eliminations            |  |                              | (9,572  | ) |                  |   | (11,404 | )
|                                     |  |                              |         |   |                  |   |         |  
|Total                                |  | $                            | 348,747 |   |                  | $ | 369,212 |  
|                                     |  |                              |         |   |                  |   |         |  
|                                     | 
|                                     |  | Three Months Ended March 31, |        
|                                     |  | 2005                         |         |   | 2004             |  
|Revenues:                            |  |                              |         |   |                  |   |         |  
|CuraGen                              |  | $                            | 1,384   |   |                  | $ | 1,512   |  
|454                                  |  |                              | 2,162   |   |                  |   | 108     |  
|Intercompany eliminations            |  |                              | (116    | ) |                  |   | (5      | )
|                                     |  |                              |         |   |                  |   |         |  
|Total                                |  | $                            | 3,430   |   |                  | $ | 1,615   |  
|                                     |  |                              |         |   |                  |   |         |  
|Operating expenses:                  |  |                              |         |   |                  |   |         |  
|CuraGen                              |  | $                            | 17,831  |   |                  | $ | 15,767  |  
|454                                  |  |                              | 4,840   |   |                  |   | 4,231   |  
|Intercompany eliminations            |  |                              | (116    | ) |                  |   |        |  
|                                     |  |                              |         |   |                  |   |         |  
|Total                                |  | $                            | 22,555  |   |                  | $ | 19,998  |  
|                                     |  |                              |         |   |                  |   |         |  
|Net loss:                            |  |                              |         |   |                  |   |         |  
|CuraGen                              |  | $                            | 17,660  |   |                  | $ | 15,384  |  
|454                                  |  |                              | 2,646   |   |                  |   | 4,040   |  
|Minority interest in subsidiary loss |  |                              | (907    | ) |                  |   | (1,385  | )
|                                     |  |                              |         |   |                  |   |         |  
|Total                                |  | $                            | 19,399  |   |                  | $ | 18,039  |  
|                                     |  |                              |         |   |                  |   |         |  
|Capital expenditures:                |  |                              |         |   |                  |   |         |  
|CuraGen                              |  | $                            | 4,050   |   |                  | $ | 728     |  
|454                                  |  |                              | 233     |   |                  |   | 286     |  
|Intercompany eliminations            |  |                              | (2      | ) |                  |   | (15     | )
|                                     |  |                              |         |   |                  |   |         |  
|Total                                |  | $                            | 4,281   |   |                  | $ | 999     |  
|                                     |  |                              |         |   |                  |   |         |  
|Depreciation and amortization:       |  |                              |         |   |                  |   |         |  
|CuraGen                              |  | $                            | 1,401   |   |                  | $ | 1,991   |  
|454                                  |  |                              | 599     |   |                  |   | 592     |  
|                                     |  |                              |         |   |                  |   |         |  
|Total                                |  | $                            | 2,000   |   |                  | $ | 2,583   |  
|                                     |  |                              |         |   |                  |   |         |  



8



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|7. | Inventory
|-- | ---------



Effective February 1, 2005, the date on which 454 successfully completed the installation of its first sequencing instrument at a customer
site, 454 began to capitalize, in inventory, the costs of manufacturing instrumentation and reagents for commercial sale. Direct labor and manufacturing overhead costs incurred after February 1, 2005 are included in cost of instrument and reagent
sales.



454s inventory is recorded at
the lower of cost or market on the first-in-first-out basis for non-lot controlled items, and on a specific identification basis for lot controlled items. A summary of inventory is as follows:



|                |  |                |      
|--------------- |  | -------------- | -----
|                |  | March 31, 2005
|Finished goods  |  | $              | 156  
|Work in process |  |                | 363  
|Raw materials   |  |                | 910  
|                |  |                |      
|Total           |  | $              | 1,429
|                |  |                |      



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##### Table of Contents

CURAGEN CORPORATION AND SUBSIDIARY



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



This Managements Discussion and Analysis of Financial Condition and Results of Operations as of March 31, 2005 and for the three month periods ended
March 31, 2005 and 2004 should be read in conjunction with the sections of our audited condensed consolidated financial statements and notes thereto as well as our Managements Discussion and Analysis of Financial Condition and Results of
Operations that are included in our Annual Report on Form 10-K for the year ended December 31, 2004.



Overview



We are a
genomics-based pharmaceutical development company dedicated to improving the lives of patients by developing novel protein, antibody and small molecule therapeutics in the areas of oncology, inflammatory diseases, and diabetes. Our pipeline of
therapeutics is based on targets from the human genome that we believe play a role in important mechanisms underlying disease.



We have taken a systematic approach to identifying and validating the most promising therapeutic targets from the human genome that are both applicable
and amenable to drug development. We use internal resources to develop our potential protein therapeutics and have established development alliances with Abgenix, Inc. (Abgenix) to support our antibody projects, Bayer AG
(Bayer) to support small molecule projects for diabetes, TopoTarget A/S (TopoTarget) to support small molecule histone deacetylase (HDAC) inhibitor projects for oncology and inflammatory diseases, and Seattle
Genetics, Inc. (Seattle Genetics) to support antibody-drug conjugate projects.



As our pipeline has matured over the past few years, we have decreased our early-stage target discovery efforts and focused our resources on the advancement of our pipeline of potential protein, antibody and small
molecule therapeutics through clinical development.



Pipeline



CG53135



CG53135, also referred to as fibroblast growth factor  20
(FGF-20), is a protein therapeutic discovered by CuraGen that is being investigated as a potential protein therapeutic for the prevention and treatment of oral mucositis (OM) in cancer patients that are receiving chemotherapy
with or without radiotherapy for the treatment of their underlying disease. CG53135 is a growth factor that is believed to play a role in maintaining the integrity of the gastrointestinal tract by causing regeneration of epithelial and mesenchymal
cells, enabling repopulation of the layers of the gastrointestinal tract damaged by chemotherapy and radiotherapy. In 2003, we initiated our first Phase I trial on CG53135 for the prevention of OM. During 2004, we continued to make progress on the
development of CG53135 for the prevention of OM, including the initiation of an additional Phase I trial in cancer patients undergoing bone marrow transplantation. In October 2004, we announced the initiation of a Phase II trial on CG53135 enrolling
patients in a randomized, placebo-controlled, multi-center study to determine the safety and efficacy of a single-dose of CG53135 for the prevention of OM. Approximately 200 patients will be randomized to receive a single administration of either
placebo or one of three dosages of CG53135 immediately after bone marrow transplantation. In December 2004, data from our Phase I trial on CG53135 for cancer patients undergoing bone marrow transplantation was presented in the form of a poster at
the 46thAnnual Meeting of the American Society of Hematology. Of the 22 patients presented in this poster, no
serious drug-related adverse events were noted following treatment with CG53135, and a total of 18 of 22 patients (81.8%) did not develop severe grade 3 or 4 OM.



In addition, in January 2005, we initiated a Phase I clinical trial on CG53135 to explore its role for the treatment of OM,
as opposed to the prevention strategy discussed above. This Phase I trial will evaluate the safety and tolerability of intravenously administered CG53135 on cancer patients who develop OM as a consequence of the chemotherapy they received for the
treatment of their underlying disease. We anticipate completing this Phase I study by the end of 2005.



In February 2004, we received orphan drug designation from the Food and Drug Administration (FDA) for CG53135 in OM, which we believe will
help to strengthen the program by offering important clinical development and commercialization benefits. The Orphan Drug Act of 1983 is intended to encourage companies to develop therapies for the treatment of diseases that affect fewer than
200,000 individuals in the United States at the time of application. Further criteria include the ability of the product to address an unmet medical need where no approved treatment option exists or to provide significant benefit over available
treatments. Orphan drug designation may result in seven years of market exclusivity in the United States upon FDA product approval, provided that the sponsor company continues to meet certain conditions established by the FDA. Upon marketing
authorization and during the period of market exclusivity, the FDA does not accept or approve other applications to market the same drug for the



10



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same therapeutic indication. Other incentives provided by orphan designation include protocol assistance and eligibility for research and development
support. Protocol assistance includes regulatory assistance and reduced filing fees, as well as advice on the conduct of clinical trials.



In December 2004, we received Fast Track status from the FDA to investigate CG53135 for the prevention of OM in patients receiving hematopoietic stem cell
transplantation following myeloablative chemotherapy with or without total body irradiation. The Fast Track program enables a company to file a New Drug Application (NDA) on a rolling basis as data becomes available and permits the FDA
to review the filing as it is received, rather than waiting for the entire document prior to commencing the review process. With a Fast Track designation, there is an opportunity for more frequent interactions with the FDA and the possibility of a
priority review, which could decrease the typical review period.



PXD101



In June 2004, we added PXD101, a novel HDAC inhibitor, to
our pipeline through a license and collaboration agreement with TopoTarget. PXD101 is one of the most advanced HDAC inhibitors in development and will be investigated as a potential treatment for both solid and hematologic cancers either alone, or
in combination with other cancer drugs. The collaboration with TopoTarget also provides us with access to their extensive library of HDAC inhibitor candidates. HDAC inhibitors represent a new mechanistic class of anti-cancer therapeutics that target
HDAC enzymes, and have been shown to: arrest growth of cancer cells; induce apoptosis, or programmed cell death; promote differentiation; inhibit angiogenesis; and sensitize cancer cells to overcome drug resistance. In August 2004, we signed a
clinical trials agreement with the National Cancer Institute (NCI) that provides us with access to the expertise at the NCI for the design, implementation, and monitoring of clinical trials with PXD101. Under the agreement, the NCI will
sponsor several clinical trials evaluating the activity of PXD101, either alone or in combination with other anti-cancer therapies, for the treatment of solid and hematologic malignancies. NCI-sponsored clinical trials will occur in parallel to
those sponsored by CuraGen with all data generated available for use in future product registration.



Data generated from two Phase I clinical trials evaluating PXD101 in patients with solid tumors and hematologic cancers enabled us to initiate in January
2005 a Phase II clinical trial on PXD101 for patients with advanced multiple myeloma. Data from our Phase I trial with PXD101 will be presented at the American Society of Clinical Oncology 46thAnnual Meeting in Orlando, Florida, occurring May 14-17, 2005.



In April 2005, a poster reporting preclinical data on PXD101 was presented at the 96thAnnual Meeting of the American Association for Cancer Research (AACR). The data demonstrated that PXD101 down-regulates, or diminishes, the amount
of thymidylate synthase (TS) in cancer cells. Some cancer cells overexpress TS as a mechanism to enable them to become resistant to the killing effects of 5-fluorouracil (5-FU), thus limiting the anti-tumor activity of this
drug. Additional data reported on animal models of cancer demonstrated prolonged survival in animals treated with PXD101 and 5-FU in combination, compared to those animals treated with either drug alone. Anti-tumor activity was also noted in
xenograft models where animals treated with a combination of PXD101 followed by 5-FU had significantly higher tumor growth inhibition compared to either drug used alone.



Based on these preclinical results, we anticipate initiating a Phase Ib clinical trial to evaluate combination chemotherapy,
consisting of PXD101 and 5-FU, on patients with solid tumors. Patient enrollment is expected to commence by the third quarter of 2005. After the maximum tolerated dose of PXD101 and 5-FU is defined, the study will expand and enroll up to 20
additional patients diagnosed with advanced colorectal cancer and further investigate the safety, change in expression of thymidylate synthase and anti-tumor activity of this combination.



CR002



In October 2004, we announced that CR002, our most advanced fully-human monoclonal antibody stemming from our collaboration with Abgenix, received
clearance from the FDA to be investigated as a potential treatment for IgA nephropathy. CR002 is a novel fully-human monoclonal antibody with the potential to treat forms of kidney inflammation, such as IgA nephropathy, that, if left untreated,
could progress to kidney failure. A Phase I trial with CR002 began in November 2004 to determine the maximum tolerated dose in healthy male volunteers.



In November 2004, we received orphan drug designation from the FDA for CR002 as a potential treatment to slow the progression of IgA nephropathy and delay
kidney failure in patients affected by the disease, which we believe will help to strengthen the program by offering important clinical development and commercialization benefits.



11



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CR011



In October 2004, we announced the advancement of CR011, a fully-human monoclonal antibody-drug conjugate, which we are investigating as a potential
treatment for metastatic melanoma. CR011 is the second fully-human monoclonal antibody stemming from our collaboration with Abgenix, and applies antibody-drug conjugate technology that we licensed from Seattle Genetics. In April 2005, a poster on
CR011 was presented at the AACR 96th Annual Meeting. Scientists from the Company reported data demonstrating that CR011 selectively binds to GPNMB, a protein highly expressed on the surface of melanoma cells. Furthermore, in xenograft models of
melanoma, treatment with CR011 caused significant improvements in survival, including complete and durable tumor regression, without any notable toxicity or weight loss. We anticipate that CR011 will enter clinical trials during the first half of
2006.



CT052



In October 2004, we also announced the advancement of CT052, an
investigational small molecule drug for the potential management of adult-onset (type 2) diabetes, which will be co-developed with Bayer. This compound represents the first drug candidate to enter preclinical development from our ongoing
collaboration with Bayer that was established to identify and develop promising drugs for the treatment of diabetes based upon targets we discovered. We anticipate that CT052 will enter clinical trials during the first half of 2006.



Other



In addition to CG53135, PXD101, CR002, CR011, and CT052 we have several potential protein, antibody and small molecule
therapeutics currently being evaluated in animal studies or being prepared for animal studies. These programs may lead to the filing of investigational new drug applications (INDs) in the future.



454 Life Sciences



To enable us to focus on our pipeline, we announced the formation of 454 Life Sciences Corporation (454) in
2000. This majority-owned subsidiary is commercializing novel nanoscale instrumentation and technologies for rapidly and comprehensively determining the nucleotide sequence of entire genomeswhole genome sequencing. 454s
proprietary technology is expected to have widespread applications in industrial processes, agriculture, animal health, biodefense, and human health care, including drug discovery and development, and disease diagnosis. Scientists, using the 454
technology platform, will be able to generate whole genome sequences for a wide variety of viral, bacterial and small fungi organisms. In 2005, 454 began offering instrument systems and reagents to customers for high-throughput sequencing without
the need and complexity of large-scale robotics. In March 2005, 454 announced the sale and installation of the first 454 Genome Sequencing System to the Broad Institute of MIT and Harvard, a research collaboration of the Massachusetts Institute of
Technology, Harvard University and its hospitals and the Whitehead Institute for Biomedical Research. 454 will continue scaling its technology to analyze larger model organisms, including human DNA, and to develop other genomic applications.



Summary



We expect to generate value for our shareholders by developing therapeutics. We expect to become profitable by
commercializing a subset of therapeutics stemming from our development pipeline, and establishing partnerships with pharmaceutical and biotechnology companies for the co-development and co-commercialization of other therapeutics from our development
pipeline. Our failure to successfully develop pharmaceutical products that we can commercialize would materially adversely affect our business, financial condition and results of operations. Royalties or other revenue generated from commercial sales
of products developed through the application of our technologies and expertise are not expected for several years, if at all. We expect that our revenue or income sources for at least the next several years may be limited to: payments under various
collaboration agreements to the extent milestones are met; 454 grant, service and product revenue; and interest income.



We expect to continue incurring substantial expenses relating to our research and development efforts, as we focus on: preclinical studies and clinical
trials required for the development of therapeutic protein, antibody and small molecule product candidates; external programs identified by our platform as being promising and synergistic with our products and expertise; and 454, as it continues
work on the development and commercialization of its technology for whole genome analysis. Conducting clinical trials is a lengthy, time-consuming and expensive process. We will incur substantial expenses for, and devote a significant amount of time
to, these studies. As a result, we expect to incur



12



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##### Table of Contents

continued losses over the next several years, unless we are able to realize additional revenues under existing or new collaboration agreements or through
454s sales of genomic analysis services and/or complete genomic analysis systems. The timing and amounts of such revenues, if any, cannot be predicted with certainty and may fluctuate. Results of operations for any period may be unrelated to
the results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results.



The 2004 consolidated financial statements have been reclassified to conform to the classifications used in 2005. All dollar amounts in Item 2 are shown
in millions, unless otherwise noted.



Critical Accounting Policies and Use
of Estimates



The discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated
financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses and as such, actual results may differ from our estimates under different assumptions or conditions.
Our significant accounting policies are fully described in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2004 and Note 2 to our condensed consolidated financial statements
included in this Form 10-Q.



Results of Operations



The following table sets forth a comparison of the components of our
net loss for the three month periods ended March 31, 2005 and 2004:



|                                     |  |      |      |      |   |          |  |   |          |   |  |      |   
|------------------------------------ |  | ---- | ---- | ---- | - | -------- |  | - | -------- | - |  | ---- | --
|                                     |  | 2005 |      | 2004 |   | $ Change |  |   | % Change |  
|Grant revenue                        |  | $    | 0.7  |      |   |         |  | $ | 0.7      |   |  | 100  | % 
|Instrument and reagent sales         |  |      | 1.1  |      |   |         |  |   | 1.1      |   |  | 100  | % 
|Collaboration revenue                |  |      | 1.6  |      | $ | 1.6      |  |   |         |   |  |     |   
|Grant research expenses              |  |      | 0.4  |      |   |         |  |   | 0.4      |   |  | 100  | % 
|Cost of instrument and reagent sales |  |      | 0.2  |      |   |          |  |   | 0.2      |   |  | 100  | % 
|Research and development expenses    |  |      | 17.6 |      |   | 15.1     |  |   | 2.5      |   |  | 17   | % 
|General and administrative expenses  |  |      | 4.3  |      |   | 4.8      |  |   | (0.5     | ) |  | (10  | )%
|Interest income                      |  |      | 2.1  |      |   | 2.0      |  |   | 0.1      |   |  | 5    | % 
|Interest expense                     |  |      | 3.4  |      |   | 2.9      |  |   | 0.5      |   |  | 17   | % 
|Loss on extinguishment of debt       |  |      |     |      |   | 0.3      |  |   | (0.3     | ) |  | (100 | )%
|Income tax benefit                   |  |      | 0.1  |      |   | 0.1      |  |   |         |   |  |     |   
|Minority interest in subsidiary loss |  |      | 0.9  |      |   | 1.4      |  |   | (0.5     | ) |  | (36  | )%
|                                     |  |      |      |      |   |          |  |   |          |   |  |      |   
|Net loss                             |  | $    | 19.4 |      | $ | 18.0     |  |   |          |   |  |      |   
|                                     |  |      |      |      |   |          |  |   |          |   |  |      |   



The following table
sets forth a comparison of revenue by segment, for the three month periods ended March 31, 2005 and 2004:



|                             |  |      |     |      |   |          |  |   |          |   |  |     |   
|---------------------------- |  | ---- | --- | ---- | - | -------- |  | - | -------- | - |  | --- | --
|                             |  | 2005 |     | 2004 |   | $ Change |  |   | % Change |  
|Grant revenue:               |  |      |     |      |   |          |  |   |          |   |  |     |   
|454                          |  | $    | 0.7 |      | $ |         |  | $ | 0.7      |   |  | 100 | % 
|                             |  |      |     |      |   |          |  |   |          |   |  |     |   
|Total                        |  | $    | 0.7 |      | $ |         |  |   |          |   |  |     |   
|                             |  |      |     |      |   |          |  |   |          |   |  |     |   
|Instrument and reagent sales |  |      |     |      |   |          |  |   |          |   |  |     |   
|454                          |  | $    | 1.1 |      | $ |         |  | $ | 1.1      |   |  | 100 | % 
|                             |  |      |     |      |   |          |  |   |          |   |  |     |   
|Total                        |  | $    | 1.1 |      | $ |         |  |   |          |   |  |     |   
|                             |  |      |     |      |   |          |  |   |          |   |  |     |   
|Collaboration revenue:       |  |      |     |      |   |          |  |   |          |   |  |     |   
|CuraGen                      |  | $    | 1.4 |      | $ | 1.6      |  | $ | (0.2     | ) |  | (13 | )%
|454                          |  |      | 0.2 |      |   |         |  |   | 0.2      |   |  | 100 | % 
|                             |  |      |     |      |   |          |  |   |          |   |  |     |   
|Total                        |  | $    | 1.6 |      | $ | 1.6      |  |   |          |   |  |     |   
|                             |  |      |     |      |   |          |  |   |          |   |  |     |   



Grant
revenue. The increase in grant revenue for the period ended March 31, 2005 was a result of two federal grants awarded to 454 in May 2004 and September 2004 from the National Human Genome Research Institute, one of the National Institutes of
Health (NIH). These grants will partially fund the continued scale up of 454s technology toward sequencing larger genomes. We expect 2005 grant revenue to increase in comparison to 2004, as the research outlined in these two grants
will be conducted for the entire fiscal year.



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##### Table of Contents

Instrument and reagent sales. During the three month period ended March 31, 2005, 454
commercialized its novel nanoscale instruments and reagents and recognized $1.1 million in revenue related to sales to its customers. We expect instrument and reagent revenues during the remaining quarters of 2005 to continue to increase through
sales to existing and new customers, as 454s technology is adopted in the market place. Instrument sales are recognized upon the completion of installation of the equipment and training of customer personnel. However, certain customers have
required that 454s instrument be tested prior to accepting the instrument. For those customers, revenue is recognized upon acknowledgement of acceptance from the customer. Reagent sales are recognized upon shipment of the products under FOB
shipping or FOB destination based upon terms and conditions outlined in 454 customers purchase orders.



Collaboration revenue. The decrease in CuraGens collaboration revenue for the period ended March 31, 2005 was primarily related to a
decline in revenue recognized from various strategic alliances and in the volume of projects related to the Bayer alliance. We expect that 2005 collaboration revenue will remain fairly constant as compared to 2004, reflecting continued progress on
the Bayer alliance.



The increase in 454s collaboration
revenue for the period ended March 31, 2005 was related to the sales of genomic analysis services as 454 continued to commercialize its sequencing platform. We expect 454s 2005 collaboration revenue to continue to increase during the remaining
quarters of 2005 as 454 continues to commercialize its platform.



Grant research expenses.The increase in grant research expenses for the period ended March 31, 2005 was a result of two federal grants awarded to 454 in May 2004 and September 2004 from the NIH, which will partially fund the
scale up of 454s technology toward sequencing larger genomes. Grant research expenses for the first grant were recorded beginning in mid-May 2004 and for the second grant beginning at the end of September 2004. The expenses included personnel
costs and lab supplies that were directly related to the research outlined in the grant award. We expect 2005 grant expenses to increase in comparison to 2004, as the research outlined in these two grants will be conducted for the entire fiscal
year.



Cost of instrument and reagent sales.
Effective February 1, 2005, the date on which 454 successfully completed the installation of its first sequencing instrument at a customer site, 454 began to capitalize, in inventory, the costs of manufacturing instrumentation and reagents for
commercial sale. Included in cost of instrument and reagent sales is (1) raw material, which was previously capitalized as a fixed asset, valued at the net book value on February 1, 2005 and (2) raw material purchased, and direct labor and
manufacturing overhead costs incurred, after February 1, 2005. 454s cost of instrument and reagent sales are recorded at the lower of cost or market on the first-in-first-out basis for non-lot controlled items and on a specific identification
basis for lot controlled items. We anticipate that 454s gross margins on sales of instruments and reagents will fluctuate from quarter to quarter during 2005.



Research and development expenses.The following table sets forth a comparison of research and development
expenses by segment, for the three month periods ended March 31, 2005 and 2004:



|                                   |  |      |      |      |   |          |  |   |          |   |  |     |   
|---------------------------------- |  | ---- | ---- | ---- | - | -------- |  | - | -------- | - |  | --- | --
|                                   |  | 2005 |      | 2004 |   | $ Change |  |   | % Change |  
|Research and development expenses: |  |      |      |      |   |          |  |   |          |   |  |     |   
|CuraGen                            |  | $    | 14.9 |      | $ | 12.0     |  | $ | 2.9      |   |  | 24  | % 
|454                                |  |      | 2.7  |      |   | 3.1      |  |   | (0.4     | ) |  | (13 | )%
|                                   |  |      |      |      |   |          |  |   |          |   |  |     |   
|Total                              |  | $    | 17.6 |      | $ | 15.1     |  |   |          |   |  |     |   
|                                   |  |      |      |      |   |          |  |   |          |   |  |     |   



Research and
development expenses consist primarily of: salary and benefits; supplies and reagents; contractual and manufacturing costs; perpetual license fees; depreciation and amortization; and allocated facility costs. Our research and development efforts are
concentrated on four major project areas: collaborations; preclinical drug candidates; clinical trials; and our majority-owned subsidiary, 454. With the exception of 454, we budget and monitor our research and development costs by expense category,
rather than by project, because these costs often benefit multiple projects and/or our technology platform.



14



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##### Table of Contents

Below is a summary that reconciles our total research and development expenses for the three month
periods ended March 31, 2005 and 2004 by the major categories mentioned above:



|                                        |  |      |      |      |   |          |  |   |          |   |  |     |   
|--------------------------------------- |  | ---- | ---- | ---- | - | -------- |  | - | -------- | - |  | --- | --
|                                        |  | 2005 |      | 2004 |   | $ Change |  |   | % Change |  
|Salary and benefits                     |  | $    | 4.6  |      | $ | 6.0      |  | $ | (1.4     | ) |  | (23 | )%
|Supplies and reagents                   |  |      | 1.6  |      |   | 2.9      |  |   | (1.3     | ) |  | (45 | )%
|Contractual and manufacturing costs     |  |      | 4.4  |      |   | 2.5      |  |   | 1.9      |   |  | 76  | % 
|Perpetual license fees                  |  |      | 4.0  |      |   |         |  |   | 4.0      |   |  | 100 | % 
|Depreciation and amortization           |  |      | 1.2  |      |   | 1.6      |  |   | (0.4     | ) |  | (25 | )%
|Allocated facility costs                |  |      | 1.8  |      |   | 2.1      |  |   | (0.3     | ) |  | (14 | )%
|                                        |  |      |      |      |   |          |  |   |          |   |  |     |   
|Total research and development expenses |  | $    | 17.6 |      | $ | 15.1     |  |   |          |   |  |     |   
|                                        |  |      |      |      |   |          |  |   |          |   |  |     |   



The increase in
research and development expenses for CuraGen for the three months ended March 31, 2005 was primarily due to: an increase in contractual and manufacturing costs related to our preclinical studies and clinical trials, and perpetual license fee
payments of approximately $4.0 million (primarily related to the TopoTarget and Seattle Genetics collaborations); offset by a reduction in salary and benefits, and supplies and reagents, in connection with the October 2004 restructuring plan. We
anticipate slight increases in research and development expenses during 2005 as compared to 2004, primarily due to contractual services related to clinical trials and manufacturing; perpetual licensing fees; and milestone payments, primarily to
TopoTarget.



The decrease in research and development expenses
for 454 for the three months ended March 31, 2005 was primarily due to decreased salary and benefits, supplies and reagents, contractual and manufacturing costs and depreciation and amortization.



As soon as we start to conduct a Phase I clinical trial for a potential
clinical candidate, we begin to track the direct research and development expenses associated with that clinical candidate. The following table shows cumulative direct research and development expenses associated with each clinical candidate as of
March 31, 2005:



|                                        |  |                |  |                                 |      |            |                                                        |              |                       
|--------------------------------------- |  | -------------- |  | ------------------------------- | ---- | ---------- | ------------------------------------------------------ | ------------ | ----------------------
|                                        |  |                |  | Cumulative Clinical Trial Costs |      |            |                                                        |             
|Therapeutic Area and Clinical Candidate |  | Class          |  | March 31, 2005                  |      | Indication |                                                        | Trial Status
|Cancer Supportive Care CG53135          |  | Protein        |  | $                               | 18.6 |            | Oral Mucositis - PreventionOral Mucositis - Treatment  |              | Phase IIPhase I       
|                                        |  |                |  |                                
|Oncology PXD101                         |  | Small Molecule |  | $                               | 7.5  |            | Multiple MyelomaSolid TumorsHematological Malignancies |              | Phase IIPhase IPhase I
|                                        |  |                |  |                                
|Kidney Inflammation CR002               |  | Antibody       |  | $                               | 1.0  |            | IgA Nephropathy                                        |              | Phase I               



Currently, our
potential pharmaceutical products require significant research and development efforts and preclinical testing, and will require extensive clinical trials prior to submitting an application to regulatory agencies for their commercial use. Although
we are conducting human studies with respect to CG53135, PXD101, and CR002, we may not be successful in developing or commercializing these or other products. Our product candidates are subject to the risks of failure inherent in the development and
commercialization of pharmaceutical products and we cannot currently reliably estimate when, if ever, our product candidates will generate revenue and cash flows.



Completion of research and development, preclinical testing and clinical trials may take many years. Estimates of completion
periods for any of our major research and development projects are highly speculative and variable, depending on the nature of the disease indication, how common it is among the general populace, and the results of the research. For example,
preclinical testing and clinical trials can often go on for an indeterminate period of time since the results of tests are continually monitored, with each test considered complete only when sufficient data has been accumulated to assess
whether the next phases are warranted or whether the effort should be abandoned. Typically, Phase I clinical trials are expected to last between 12 and 24 months, Phase II clinical trials are expected to last between 24 and 36 months and Phase III
clinical trials are expected to last between 24 and 60 months. The most significant time and costs associated with clinical development are the Phase III trials as they tend to be the longest and most comprehensive studies conducted during the drug
development process.



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In addition, many factors may delay the commencement and speed of completion of preclinical testing and
clinical trials, including the number of patients participating in the trial, the duration of patient follow-up required, the number of clinical sites at which the trials are conducted, and the length of time required to locate and enroll suitable
patient subjects. The successful completion of our development programs and the successful development of our product candidates are highly uncertain and are subject to numerous challenges and risks. Therefore, we cannot presently estimate
anticipated completion dates for any of our projects, as described more fully in the Risk Factors section under the heading Risks Related to Our Business.



Due to the variability in the length of time necessary to develop a product candidate, the uncertainties related to the cost
of projects and the need to obtain governmental approval for commercialization, accurate and meaningful estimates of the ultimate costs to bring our product candidates to market are not available. If our major research and development projects are
delayed, then we can expect to incur additional costs in conducting our preclinical testing and clinical trials and a longer period of time before we become profitable from our operating activities, as described more fully in the Risk Factors
section under the headings We have a history of operating losses and expect to incur losses in the future and We may need to raise additional funding, which may not be available on favorable terms, if at all. Accordingly, the
timing of the potential market approvals for our existing product candidates, CG53135, PXD101, CR002, and future product development candidates, may have a significant impact on our capital requirements.



General and administrative expenses. General and administrative
expenses for the three months ended March 31, 2005 decreased slightly as compared to the same period in 2004 as a result of careful control over expenses. General and administrative expenses are expected to decrease slightly during 2005 as compared
to 2004, as a result of the recent corporate restructuring and lower legal patent costs.



Interest income. Interest income for the three months ended March 31, 2005 increased slightly compared to the same period in 2004 primarily due to higher yields in our investment portfolio, offset by
lower cash and investment balances. We earned an average yield of 2.5% in the first quarter of 2005 as compared to 2.0% in the first quarter of 2004. During 2005, we expect the yields in our investment portfolio to continue to be slightly higher
than 2004. However, due to the utilization of cash and investments balances in the normal course of operations, we anticipate interest income to decrease in 2005. In the event that during 2005 we use cash to repurchase a portion of our remaining
existing debt due in 2007, our estimate of the size of anticipated decrease in interest income for 2005 will differ accordingly.



Interest expense. We expect interest expense, including interest paid to debt holders as well as amortization of deferred financing costs,
to increase marginally during 2005, primarily attributable to the interest paid semi-annually to the holders of our $130.0 million 6% convertible subordinated debentures due in 2007, and our $110.0 million 4% convertible subordinated notes due in
2011. In the event that during 2005 we use cash to repurchase a portion of our remaining existing debt due in 2007, our estimate of 2005 interest expense will differ accordingly.



Income tax benefit. We recorded an income tax benefit during the first quarter of 2005 as a result of
Connecticut legislation, which allows companies to obtain cash refunds from the State of Connecticut at a rate of 65% of their annual research and development expense credit, in exchange for forgoing carryforward of the research and development
credit. For the year ended December 31, 2004, the income tax benefit included the resulting expiration of the State of Connecticut statute, as it relates to the Year 2000 income tax benefit. We expect the 2005 income tax benefit to be consistent
with 2004 (before adjustments to reflect statute expirations), as 2005 qualified expenses are expected to remain relatively constant as compared to 2004.



Minority interest in subsidiary loss. Minority interest in subsidiary loss for the three months ended March 31, 2005 (which is the portion
of 454s loss attributable to shareholders of 454 other than us) decreased during the first quarter of 2005 as compared to the same period in 2004 due to 454 revenue recognized during this period, from the sales of instruments and reagents as
well as sales of genomic analysis services. During 2005, losses attributed to the minority ownership in 454 are expected to decrease, as 454 increases sales of instruments and reagents as well as sequencing services. In the event that during 2005
the cumulative losses applicable to the minority interest in subsidiary exceed the minority interest in the equity capital of 454, all further losses applicable to the minority interest will be charged to CuraGen.



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Liquidity and Capital Resources



Since our inception, we have financed our operations and met our capital expenditure requirements primarily through
convertible subordinated debt offerings, public equity offerings, private placements of equity securities, revenues received under our collaborative research agreements and government grants, and exercises of stock options. As of March 31, 2005, we
had recognized $114.8 million of cumulative sponsored research revenues from collaborative research agreements and government grants. At March 31, 2005, our gross investment in lab and office equipment, computers, land and leasehold improvements was
$52.6 million. Since inception, we have not had any off-balance sheet arrangements. To date, inflation has not had a material effect on our business.



454 received two federal grants during 2004, for specific purposes that are subject to review and audit by the grantor agencies. Such audits could lead to
requests for reimbursement by the grantor agency for any expenditures disallowed under the terms of the grant. Additionally, any noncompliance with the terms of the grant could lead to loss of current or future awards.



Cash and investments.The following table depicts the
components of our operating, investing and financing activities for the three months ended March 31, 2005, using the direct cash flow method:



|                                                                   |  |   |       |  
|------------------------------------------------------------------ |  | - | ----- | -
|Cash received from collaborators                                   |  | $ | 2.3   |  
|Cash received from customers                                       |  |   | 0.6   |  
|Cash received from grantor                                         |  |   | 0.3   |  
|Cash paid to suppliers and employees                               |  |   | (17.8 | )
|Restructuring and related charges paid                             |  |   | (0.5  | )
|Interest income received                                           |  |   | 2.0   |  
|Interest expense paid                                              |  |   | (6.1  | )
|                                                                   |  |   |       |  
|Net cash and investments used in operating activities              |  |   | (19.2 | )
|                                                                   |  |   |       |  
|Cash paid to acquire property and equipment, net of sales proceeds |  |   | (4.2  | )
|                                                                   |  |   |       |  
|Net cash and investments used in investing activities              |  |   | (4.2  | )
|                                                                   |  |   |       |  
|Cash received from employee stock option exercises                 |  |   | 0.2   |  
|                                                                   |  |   |       |  
|Net cash and investments provided by financing activities          |  |   | 0.2   |  
|                                                                   |  |   |       |  
|Unrealized loss on marketable securities                           |  |   | (1.5  | )
|                                                                   |  |   |       |  
|Net decrease in cash and investments                               |  |   | (24.7 | )
|Cash and investments, beginning of period                          |  |   | 328.1 |  
|                                                                   |  |   |       |  
|Cash and investments, end of period                                |  | $ | 303.4 |  
|                                                                   |  |   |       |  



In accordance with our
investment policy, we are utilizing the following investment objectives for cash and investments: (1) investment decisions are made with the expectation of minimum risk of principal loss, even with a modest penalty in yield; (2) appropriate cash
balances and related short-term funds are maintained for immediate liquidity needs, and appropriate liquidity is available for medium-term cash needs; and (3) maximum yield is achieved.



Future Liquidity. During the next twelve months, we expect to continue to fund our operations through a
combination of the following sources: cash and investment balances; interest income; instrument and reagent sales; collaboration revenue; grant revenue; potential public securities offerings; and/or private strategic-driven common stock offerings.
We also plan to continue making substantial investments to advance our preclinical and clinical drug pipeline, as well as commercializing 454s genomic analysis technology. In that regard, we foresee the following as significant uses of
liquidity: salary and benefits; supplies and reagents; contractual services related to clinical trials and manufacturing; perpetual license fees; potential milestone payments; legal expenses in support of the continued protection of our intellectual
property portfolio; costs related to 454, as it continues to commercialize and develop new technologies for whole genome analysis; external programs identified by our platform as being promising and synergistic with our products and expertise;
cost-sharing of expenses with Bayer related to CT052 preclinical development, in which both parties will jointly fund the relevant preclinical research, development and commercialization activities; and capital expenditures during the second quarter
of 2005, primarily for the expansion of our existing protein production laboratory facilities. In addition, we expect the payments of interest to the holders of our convertible subordinated debt due in 2007 and in 2011 to be a continued significant
use of liquidity.



Depending on market and other conditions,
from time to time, we may repurchase a portion of the existing 6% convertible subordinated debentures due 2007 in open market purchases, in privately negotiated transactions, or



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otherwise. In addition, we also may use sources of liquidity for working capital, general corporate purposes and potentially for future acquisitions of
complementary businesses or technologies. The amounts and timing of our actual expenditures will depend upon numerous factors, including the amount and extent of our acquisitions, our product development activities, and our investments in technology
and the amount of cash generated by our operations. Actual expenditures may vary substantially from our estimates. Our failure to use sources of liquidity effectively could have a material adverse effect on our business, results of operations and
financial condition.



We believe that our existing cash and
investment balances and other sources of liquidity will be sufficient to meet our requirements for the next twenty-four months. Our operating and capital expenditures are considered to be crucial to our future success, and by continuing to make
strategic investments in our preclinical and clinical drug pipeline, we believe that we are building substantial value for our shareholders. The adequacy of our available funds to meet our future operating and capital requirements, including the
repayment of our remaining $130.0 million of 6% convertible subordinated debentures due February 2, 2007 and our $110.0 million of 4% convertible subordinated notes due February 15, 2011, will depend on many factors. These factors include: the
number, breadth and progress of our research, product development and clinical programs; the costs and timing of obtaining regulatory approvals for any of our products; potential future acquisitions of complementary businesses or technologies;
in-licensing of pharmaceutical products; and costs incurred in enforcing and defending our patent claims and other intellectual property rights.



While we will continue to explore alternative sources for financing our business activities, including the possibility of public securities offerings
and/or private strategic-driven common stock offerings, we cannot be certain that in the future these sources of liquidity will be available when needed or that our actual cash requirements will not be greater than anticipated. In appropriate
strategic situations, we may seek financial assistance from other sources, including contributions by others to joint ventures and other collaborative or licensing arrangements for the development and testing of products under development. However,
should we be unable to obtain future financing either through the methods described above or through other means, we may be unable to meet the critical objective of our long-term business plan, which is to successfully develop and market
pharmaceutical products, and may be unable to continue operations. This result could cause our shareholders to lose all or a substantial portion of their investment.



Recently Enacted Pronouncements



In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123R,
Share-Based Payment (SFAS 123R) which is a revision of FASB Statement 123, Accounting for Stock-Based Compensation. Statement 123, as originally issued, is effective until the provisions of SFAS 123R are fully
adopted. SFAS 123R is effective for public entities that do not file as a small business issuer, as of the beginning of the first fiscal year beginning after June 15, 2005, and therefore, we will be required to adopt SFAS 123R on January 1, 2006.
The proforma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments
for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entitys equity instruments or that may be settled by the issuance of those
equity instruments. Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The
transition methods include modified prospective and retroactive adoption options. We anticipate utilizing the modified prospective method which requires that compensation expense be recorded for all unvested stock options at the beginning of the
first quarter of adoption of SFAS 123R, while the retroactive methods would record compensation expense for all unvested stock options beginning with the first period restated. We are evaluating the requirements of SFAS 123R and expect that the
adoption of SFAS 123R will have a material impact on our consolidated results of operations. We have not yet determined the effect of adopting SFAS 123R, nor have we determined whether the adoption will result in amounts that are similar to the
current pro forma disclosures under SFAS 123.



In November
2004, the FASB issued Statement of Financial Accounting No. 151, Inventory Costs-an amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to
clarify the accounting for abnormal amounts of idle facility expense, freight handling costs, and wasted material (spoilage). SFAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of
so abnormal. In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for inventory cost incurred during
fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 24, 2004. The provisions of SFAS 151 should be applied prospectively. We have evaluated and
recorded inventory costs under the provisions of SFAS 151 and there was no material effect.



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In December 2004, the FASB issued Statement of Financial Accounting No. 153, Exchanges of
Nonmonetary Assets-an amendment of APB Opinion No. 29 (SFAS 153). SFAS 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. The provisions of SFAS 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset
exchanges occurring in fiscal periods beginning after December 16, 2004. The provisions of SFAS 153 should be applied prospectively. We have evaluated the provisions of SFAS 153, and we do not believe its adoption will have an impact on our
financial statements.



In March 2004, the FASB issued Emerging
Issues Task Force (EITF) Issue No. 03-1 Other-Than-Temporary Impairments and Its Application of Certain Investments. This statement provides guidance for assessing impairment losses on debt and equity investments. EITF Issue
No. 03-1 also requires additional disclosures in the footnotes to the financial statements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF Issue No. 03-1; however, the
disclosure requirements remain effective and have been adopted. We will evaluate the effect, if any, of EITF 03-1 when final guidance is released.



Certain Factors That May Affect Results of Operations



This report contains certain forward-looking statements that are subject to certain risks and uncertainties. Generally, these statements can be identified
by the use of terms such as estimate, project, plan, intend, expect, believe, anticipate, should, may, will, and similar
expressions. Forward-looking statements may include statements about: (i) our expectation that we will enroll approximately 200 patients for our Phase II trial on CG53135; (ii) our expectation that we will complete a CG53135 Phase I trial for the
treatment of OM by the end of 2005; (iii) our belief that the FDAs orphan drug designation for CG53135 and CR002 will help strengthen the programs by offering important clinical development and commercialization benefits; (iv) our expectation
that we will investigate PXD101 as a potential treatment for both solid and hematologic cancers either alone, or in combination with other cancer drugs; (v) our expectation that NCI-sponsored clinical trials will occur in parallel to those we
sponsor, with all data generated available for use in future product registration; (vi) the expectation to initiate a Phase Ib clinical trial to evaluate combination chemotherapy, consisting of PXD101 and 5-FU, on patients with solid tumors with
patient enrollment to commence by the third quarter of 2005; (vii) our expectation that our Phase Ib clinical trial of PXD101 and 5-FU will expand and enroll up to 20 additional patients and further investigate the safety, change in expression of
thymidylate synthase and anti-tumor activity of this combination; (viii) our expectation that CR011 and CT052 will enter clinical trials during the first half of 2006; (ix) our expectation that many of the INDs that we anticipate filing in the
future will be from our pipeline, and have been or are ready to be evaluated in animal studies; (x) the expectation that 454s proprietary technology will have widespread applications in industrial processes, agriculture, animal health,
biodefense, human health care, including drug discovery and development, and disease diagnosis; (xi) the ability of 454 to generate whole genome sequences for a wide variety of viral, bacterial and small fungi organisms; (xii) the ability of 454 to
continue scaling its technology to analyze larger model organisms, including human DNA, and develop other genomic applications; (xiii) our expectation that we will generate value for our shareholders by developing therapeutics; (xiv) our expectation
to become profitable by commercializing a subset of therapeutics stemming from our development pipeline, and establishing partnerships with pharmaceutical and biotechnology companies for the co-development and co-commercialization of therapeutics
from our development pipeline; (xv) our expectation that our revenue or income sources for at least the next several years may be limited to: payments under various collaboration agreements to the extent milestones are met; 454 grant, service and
product revenue; and interest income; (xvi) our expectation to continue incurring substantial expenses relating to our research and development efforts; (xvii) our expectation to incur continued losses over the next several years; (xviii) that NIH
grants will partially fund the continued scale up of 454s technology toward sequencing larger genomes; (xix) our expectation that grant revenue will increase in comparison to 2004; (xx) our expectation that revenue recognized will continue to
increase for 454 in 2005 from the sale of instrument systems and reagents; (xxi) our expectation that 2005 collaboration revenue will remain fairly constant as compared to 2004; (xxii) our expectation that 454s 2005 collaboration revenue will
increase; (xxiii) our expectation that grant research expenses will increase in comparison to 2004; (xxiv) our expectation that gross margins on sales of instruments and reagents will fluctuate from quarter to quarter during 2005; (xxv) our
anticipation that research and development expenses during 2005 will increase slightly as compared to 2004; (xxvi) our expectation that general and administrative expenses will decrease slightly during 2005 as compared to 2004; (xxvii) our plans to
pay the remaining cash requirements of $0.5 million through the end of 2006, as part of our June 2003 restructuring plan; (xxviii) our plans to pay the remaining cash requirements of $0.2 through June 2005, as part of our October 2004 restructuring
plan; (xxix) our expectation that during 2005, the yields in our investment portfolio will be slightly higher than 2004; (xxx) our anticipation that interest income will decrease in 2005; (xxxi) our expectation that interest expense, including
interest paid to debt holders as well as amortization of deferred financing costs, will increase marginally during 2005; (xxxii) our expectation that the 2005 income tax benefit will be consistent with 2004 (before adjustments to reflect statute
expirations); (xxxiii) our expectation that during 2005 the losses attributed to the minority ownership in 454 will decrease; (xxxiv) our expectation that during the next twelve months, we will continue to fund our operations through a combination
of the following sources: cash and investment balances; interest income; instrument and reagent sales; collaboration revenue; grant revenue; potential public securities offerings; and/or private strategic-driven common stock offerings; (xxxv) our
plan to continue making substantial investments to advance our preclinical and clinical drug pipeline, as well as commercializing 454s genomic analysis technology; (xxxvi) our belief that the following will be significant uses of liquidity:
salary and benefits; supplies and reagents; contractual services related to clinical trials and manufacturing; perpetual license fees; potential milestone payments; legal expenses in support of the continued protection of our intellectual property
portfolio; costs related to 454, as it continues to commercialize and develop new technologies for whole genome analysis; external programs identified by our platform as being promising and synergistic with our products and expertise; cost-sharing
of expenses with Bayer related to CT052 preclinical development, in which both parties will jointly fund the relevant preclinical research, development and commercialization activities; capital expenditures during the second quarter of 2005,
primarily for the expansion of our existing protein production laboratory facilities; and payments of interest to the holders of our convertible subordinated debt due in 2007 and 2011; (xxxvii) the possibility that we may repurchase a portion of the
existing 6% convertible subordinated debentures due 2007 in open market purchases, in privately negotiated transactions, or otherwise; (xxxviii) our belief that our existing cash and investment balances and other sources of liquidity will be
sufficient to meet our requirements for the next twenty-four months; and (xxxix) that we will continue to explore alternative sources for financing our business activities, including the possibility of public securities offerings, private
strategic-driven common stock offerings, financial assistance from other sources.



These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements,
therefore, should be considered in light of all of the information included or referred to in this report, including the cautionary information set forth under the heading Risk Factors below. We disclaim any intention or obligation to update or
revise any forward-looking statements, whether as a result of new information, future events, or otherwise, unless required by law.



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Risk Factors



Risks Related to Our Business



Because our business strategy is still largely untested, we do not know whether we will be able to commercialize any of our products or to what extent we will generate
revenue or become profitable.



We do not know whether we
can implement our business strategy successfully because we are in the early stages of development. Initially, we set out to find as many genes and their related functions as possible and are now using that information to develop our own therapeutic
products. This strategy is largely untested. Other companies first target particular diseases and try to find cures for them, have a limited number of genes and proteins of potential therapeutic interest, or rely on other more proven strategies. If
our strategy does not result in the development of products that we can commercialize, we will be unable to generate revenue. We have not completed development of any product based on our genomics research. Although we have three products being
investigated in clinical trials, we cannot be certain that these or any future products will receive marketing approval. If we are unable to commercialize products, we may not be able to recover our investment in our product development efforts.



Because clinical trials for our products will be expensive and protracted
and their outcome is uncertain, we must invest substantial amounts of time and money that may not yield viable products.



Conducting clinical trials is a lengthy, time-consuming and expensive process. Before obtaining regulatory approvals for the commercial sale of any
product, we must demonstrate through laboratory, animal and human studies that such product is both effective and safe for use in humans. We will incur substantial expense for, and devote a significant amount of time to, these studies.



Completion of clinical trials may take many years. The length of time
required varies substantially according to the type, complexity, novelty and intended use of the product candidate. The FDA monitors the progress of each phase of testing, and may require the modification, suspension, or termination of a trial if it
is determined to present excessive risks to patients. Our rate of commencement and completion of clinical trials may be delayed by many factors, including:



| |  |  | our inability to manufacture sufficient quantities of materials for use in clinical trials;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | our inability to identify, enroll and initiate sites to conduct clinical trials;
| | - |  | --------------------------------------------------------------------------------



| |  |  | variability in the number and types of patients available for each study, as well as the difficulty in enrolling patients in each study;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulty in maintaining contact with patients after treatment, resulting in incomplete data;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | unforeseen safety issues or side effects;
| | - |  | -----------------------------------------



| |  |  | poor efficacy or unanticipated adverse effects of products during the clinical trials;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | institutional review board delays at institutions assisting us with our clinical trials; and
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | government or regulatory delays.
| | - |  | --------------------------------



Studies that we conduct, or studies which third parties conduct on our behalf, may not demonstrate sufficient effectiveness and safety to obtain the
requisite regulatory approvals for these or any other potential products. Regulatory authorities may not permit us to undertake any additional clinical trials. The clinical trial process may be accompanied by substantial delay and expense and there
can be no assurance that the data generated in these studies ultimately will be sufficient for marketing approval by the FDA.



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We have three products in clinical development and our other products are in preclinical development.
None of these products may demonstrate sufficient effectiveness or safety to obtain the requisite regulatory approvals required for initiation or continuation of clinical studies or obtaining marketing approval.



Because we have limited experience in developing, commercializing and marketing products,
we may be unsuccessful in our efforts to do so.



Currently, we are developing several potential pharmaceutical products, and such products will require significant research and development and preclinical testing, and will require extensive clinical testing prior to our submitting any
regulatory application for their commercial use. Although we are conducting human studies with respect to three products, we have limited experience with these activities and may not be successful in developing or commercializing these or other
products. These activities, if undertaken without the collaboration of others, will require the expenditure of significant funds. Such potential pharmaceutical products will be subject to the risks of failure inherent in the development of
pharmaceutical products based on new technologies. Before we can commercialize a product, we must rigorously test the product in the laboratory and complete extensive human studies. Even if we complete such studies, our ability to develop and
commercialize products will depend on our ability to:



| |  |  | complete laboratory testing and human studies;
| | - |  | ----------------------------------------------



| |  |  | obtain and maintain necessary intellectual property rights to our products;
| | - |  | ---------------------------------------------------------------------------



| |  |  | obtain and maintain necessary regulatory approvals related to the efficacy and safety of our products;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | enter into arrangements with third parties to manufacture our products on our behalf; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | deploy sales and marketing resources effectively or enter into arrangements with third parties to provide these functions.
| | - |  | --------------------------------------------------------------------------------------------------------------------------



As a result of these possibilities, we may not be able to develop through our
research and development activities any commercially viable products. We cannot be certain that expenses for testing and study will yield profitable products or even products approved for marketing by the FDA. If we are not successful in identifying
products that we can develop commercially, we may be unable to recover the large investment we have made in research, development and manufacturing. In addition, should we choose to develop pharmaceutical products internally, we will have to make
significant investments in pharmaceutical product development, marketing, sales and regulatory compliance resources, and we will have to establish or contract for the manufacture of products under the current good manufacturing practices
(cGMPs) of the FDA. Any potential products developed by our licensees will be subject to the same risks.



We do not have any marketed products. If we develop products that can be marketed, we intend to market the products either independently or together with
collaborators or strategic partners. If we decide to market any products independently, we will incur significant additional expenditures and commit significant additional management resources to establish a sales force. For any products that we
market together with partners, we will rely, in whole or in part, on the marketing capabilities of those parties. We may also contract with third parties to market certain of our products. Ultimately, we and our partners may not be successful in
marketing our products.



We depend on a limited number of suppliers to
manufacture and supply critical components of our development and clinical programs.



Currently, we contract with third-party manufacturers or develop products with partners and use the partners manufacturing capabilities. As we use others to manufacture our products, we depend on those parties
to comply with cGMPs, and other regulatory requirements and to deliver materials on a timely basis. These parties may not perform adequately. Any failures by these third parties may delay our development of products or the submission of these
products for regulatory approval.



We depend on third-party
research organizations to design and conduct our laboratory testing and human studies. If we are unable to obtain any necessary services on acceptable terms, we may not complete our product development efforts in a timely manner. As we rely on third
parties for laboratory testing and human studies, we may lose some control over these activities and become too dependent upon these parties. These third parties may not complete testing activities or human studies on schedule or when we request.



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Because neither we nor any of our collaborative partners have received marketing approval for any product resulting
from our research and development efforts, and may never be able to obtain any such approval, we may not be able to generate any product revenue.



All the products being developed by our collaborative partners will require additional research and development, extensive preclinical studies and
clinical trials and regulatory approval prior to any commercial sales. In some cases, the length of time that it takes for our collaborative partners to achieve various regulatory approval milestones may affect the payments that we are eligible to
receive under our collaboration agreements. We and our collaborative partners may need to address a number of technical challenges successfully in order to complete development of our products. Moreover, these products may not be effective in
treating any disease or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.



We may be unable to manufacture or obtain sufficient quantities of our products and ensure
their proper performance and quality.



Biopharmaceuticals
must be produced under the cGMPs of the FDA. We do not have facilities capable of manufacturing drug products under cGMPs and must outsource any such production. We are devoting resources to establishing our own manufacturing capabilities to support
development and preclinical activities and are contracting with third-party vendors for the manufacture of materials for use in humans. We may be unable to contract successfully for cGMPs manufacture of any products and may be unable to obtain
required quantities of our products economically. We may not be able to obtain capacity to produce a sufficient amount of commercial product to meet our clinical development and commercial needs. Failure to meet the demand for product may adversely
affect our ability to continue to market the product.



Compliance with
government regulation is critical to our business and failure to satisfy regulatory requirements could impair our business.



Prior to the marketing of any new drug developed by us, or by our collaborators, that new drug must undergo an extensive regulatory review process in the
United States and other countries. This regulatory process, which includes preclinical and clinical studies, as well as post-marketing surveillance to establish a compounds safety and efficacy, can take many years and require the expenditure
of substantial resources. Data obtained from such studies are susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Even if the FDA allows clinical testing of our products, we will still need to obtain
institutional review board approval for each site participating in a clinical study, which may involve additional delays. The rate of completion of clinical trials depends upon, among other factors, the enrollment of patients. Patient enrollment is
a function of many factors, including:



| |  |  | availability of FDA approved therapies or interventions;
| | - |  | --------------------------------------------------------



| |  |  | timing and restriction of institutional review board approval;
| | - |  | --------------------------------------------------------------



| |  |  | the size of the patient population;
| | - |  | -----------------------------------



| |  |  | proximity of patients to clinical sites;
| | - |  | ----------------------------------------



| |  |  | eligibility criteria for the study;
| | - |  | -----------------------------------



| |  |  | time commitment of a patient to the study; and
| | - |  | ----------------------------------------------



| |  |  | existence of competitive clinical trials.
| | - |  | -----------------------------------------



We have not had any of our product candidates receive approval for commercialization in the United States or elsewhere. Neither we nor our collaborators
may be able to conduct clinical testing or obtain the necessary approvals from the FDA or other regulatory authorities for any products. Failure by us or our collaborators to obtain required governmental approvals will delay or preclude our
collaborators or us from marketing drugs developed with us or limit the commercial use of such products and could have a material adverse effect on our business, financial condition and results of operations. Even where a product is exempted from
FDA clearance or approval, the FDA may impose restrictions as to the types of customers to which we can market and sell our products. Such restrictions may materially and adversely affect our business, financial condition and results of operations.



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In addition, the FDA may condition marketing approval on the conduct of specific post-marketing studies
to further evaluate safety and efficacy. Rigorous and extensive FDA regulation of pharmaceutical products continues after approval, particularly with respect to compliance with cGMPs reporting of adverse effects, advertising, promotion and
marketing. Discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or
criminal sanctions, any of which could materially adversely affect our business.



We must obtain regulatory approval by governmental agencies in other countries prior to commercialization of our products in those countries. Foreign regulatory systems may be just as rigorous, costly and uncertain as
in the United States.



We rely significantly on our collaborative partners,
and our business could be harmed if we are unable to maintain strategic alliances.



As part of our business strategy, we have strategic research and development alliances with companies to gain access to specific technologies. These alliances with other pharmaceutical and biotechnology companies may
provide us with access to unique technologies, access to capital, near-term revenues, milestone and/or royalty payments, and potential profit sharing arrangements. In return, we provide access to unique technologies, expertise in genomics, and
information on the molecular basis of disease, drug targets, and drug candidates. To date, we have entered into significant strategic alliances with Abgenix, Bayer, TopoTarget and Seattle Genetics, in addition to numerous smaller agreements to
facilitate these efforts. In these strategic alliances, either party can terminate the agreement at any time the alliance permits them to or if either party materially breaches the contract. We may not be able to maintain or expand existing
alliances or establish any additional alliances. If any of our existing collaborators were to breach or terminate their agreements with us or otherwise fail to conduct activities successfully and in a timely manner, the preclinical or clinical
development or commercialization of product candidates or research programs may be delayed or terminated.



We depend on attracting and retaining key employees.



We are highly dependent on the principal members of our management and scientific staff, including David M. Wurzer, Executive Vice President and Chief Financial Officer; Christopher K. McLeod, Executive Vice President
and interim Chief Executive Officer and President at 454; and Timothy M. Shannon, M.D., Executive Vice President and Chief Medical Officer. The loss of services of any of these personnel could materially adversely affect our business, financial
condition and results of operations. We entered into employment agreements with all of the principal members of our management team. Our future success also will depend in part on the continued services of our key scientific and management personnel
and our ability to attract, hire and retain additional personnel. There is intense competition for such qualified personnel and there can be no assurance that we will be able to continue to attract and retain such personnel. Failure to attract and
retain key personnel could materially, adversely affect our business, financial condition and results of operations.



We depend on academic collaborators, consultants and scientific advisors.



We have relationships with collaborators and consultants at academic and other institutions who conduct research at our request. These collaborators
and consultants are not our employees. Substantially all of our collaborators and consultants are employed by employers other than us and may have commitments to, or consulting or advisory contracts with, other entities that may limit their
availability to us. As a result, we have limited control over their activities and, except as otherwise required by our collaboration and consulting agreements, can expect only limited amounts of their time to be dedicated to our activities. Our
ability to discover genes and biological pathways involved in human disease, explore and validate biological activity of therapeutic candidates and commercialize products based on those discoveries may depend in part on continued collaborations with
researchers at academic and other institutions. We may not be able to negotiate additional acceptable collaborations with collaborators or consultants at academic and other institutions.



Our academic collaborators, consultants and scientific advisors may have relationships with other commercial entities, some
of which could compete with us. Our academic collaborators, consultants and scientific advisors sign agreements which provide for confidentiality of our proprietary information and of the results of studies. We may not be able to maintain the
confidentiality of our technology and other confidential information in connection with every academic collaboration or advisory arrangement, and any unauthorized dissemination of our confidential information could materially adversely affect our
business, financial condition and results of operations. Further, any such collaborator, consultant or advisor may enter into an employment agreement or consulting arrangement with one of our competitors.



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Competition in our field is intense and likely to increase.



We are subject to significant competition from organizations that are
pursuing strategies, approaches, technologies and products that are similar to our own. Many of the organizations competing with us have greater capital resources, research and development staffs and facilities and marketing capabilities. In
addition, research in the field of drug development is highly competitive. Our competitors include:



| |  |  | biotechnology companies;
| | - |  | ------------------------



| |  |  | pharmaceutical companies;
| | - |  | -------------------------



| |  |  | academic and research institutions; and
| | - |  | ---------------------------------------



| |  |  | government agencies.
| | - |  | --------------------



We compete with biotechnology and pharmaceutical companies that develop, produce and market therapeutic compounds in the U.S., Europe and elsewhere. We
face competition from a number of biotechnology and pharmaceutical companies with products in preclinical development, clinical trials or approved for conditions identical or similar to the ones we are pursuing. Other companies engaged in research
and development we face intense competition from include:



| |  |  | Amgen, Inc.;
| | - |  | ------------



| |  |  | Genentech, Inc.;
| | - |  | ----------------



| |  |  | Gloucester Pharmaceuticals, Inc.;
| | - |  | ---------------------------------



| |  |  | Human Genome Sciences, Inc.;
| | - |  | ----------------------------



| |  |  | Merck & Co., Inc.;
| | - |  | ------------------



| |  |  | Millennium Pharmaceuticals, Inc.;
| | - |  | ---------------------------------



| |  |  | Novartis, Inc.;
| | - |  | ---------------



| |  |  | Nuvelo, Inc.;
| | - |  | -------------



| |  |  | major biotechnology and pharmaceutical companies; and
| | - |  | -----------------------------------------------------



| |  |  | universities and other research institutions.
| | - |  | ---------------------------------------------



The competition listed above was selected based upon identifying those companies that we feel have business models, are developing drugs or have drugs
approved for therapeutic indications that are similar to the ones we are pursuing.



A number of organizations are attempting to rapidly identify and patent genes and gene fragments sequenced at random, typically without specific knowledge of the function of such genes or gene fragments. If our
competitors discover or characterize important genes or gene fragments before we do, it could adversely affect our ability to commercialize our products. We expect that competition in genomics research, protein therapeutics, and therapeutic
antibodies will intensify as technical advances are made and become more widely known. In addition, a number of competitors are producing proteins from genes and claiming both the proteins as potential therapeutics as well as claiming antibodies
against these proteins. In many cases generic antibody claims are being issued by the United States Patent and Trademark Office (USPTO) even though competitors have not actually made antibodies against the protein of interest, or do not
have cellular, animal, or human data to support the use of these antibodies as therapeutics. These claims on proteins as therapeutics and these claims covering all antibodies against the proteins and



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methods of use in broad human indications are being filed at a rapid rate, and some number of these claims have issued and may continue to issue. In
addition, purified proteins, therapeutic data, and antibodies, including polyclonal antibodies, mouse monoclonal antibodies and, in some cases, fully-human monoclonal antibodies, are being generated against a large number of targets within the human
genome. All of these activities may make it difficult to commercialize products, or, if licenses are made available, may make the royalty burden on these products so high as to prevent commercial success.



We may engage in acquisitions that are unsuccessful.



In the future, we may engage in acquisitions in order to exploit technology
or market opportunities. We are not experienced in acquiring and integrating new businesses. If we acquire another company, we may not be able to integrate the acquired business successfully into our existing business in a timely and non-disruptive
manner or at all. Furthermore, an acquisition may not produce the revenues, earnings or business synergies that we anticipate. If we fail to integrate the acquired business effectively or if key employees of that business leave, the anticipated
benefits of the acquisition would be jeopardized. The time, capital management and other resources spent on an acquisition that fails to meet our expectations could cause our business and financial condition to be materially and adversely affected.
In addition, acquisitions can involve material non-recurring charges and amortization of significant amounts of non-cash acquisition costs that could adversely affect our results of operations.



If our patent applications do not result in issued patents, then our
competitors may obtain rights to commercialize our discoveries.



Our business and competitive position depends on our ability to protect our products, processes and technologies. We continually file patent applications for our proprietary methods, novel uses of genes, and our development products. As of
the date of this report, we had been issued approximately 79 patents with respect to aspects of our gene portfolio, products, processes and technologies.



Our commercial success also depends in part on obtaining patent protection on genes and proteins for which we or our collaborators discover utility and on
products, methods and services based on such discoveries. We have applied for patent protection on novel genes and proteins, novel mutants of known genes and their uses, partial sequences of novel proteins and their gene sequences and uses, and
novel uses for previously identified genes discovered by third parties. We have applied for patents on antibodies against the proteins we have discovered, as well as seek or have our partners seek patent protection on the antibodies we produce
against these proteins. We have sought and intend to continue to seek patent protection for novel uses for genes and proteins and therapeutic antibodies that may have been patented by third parties. In such cases, we would need a license from the
holder of the patent with respect to such gene or protein in order to make, use or sell such gene or protein for such use. We may not be able to acquire such licenses on commercially reasonable terms, if at all. Our patent application filings that
result from the identification of genes associated with the cause or effect of a particular disease generally seek to protect the genes and the proteins encoded by such genes as well as antibodies raised against these gene products. We also seek
patent protection for our therapeutic, diagnostic and drug screening methods and products.



In 2001, the USPTO issued new guidelines for patent applications reflecting the USPTOs current policy regarding statutory written description and utility requirements for patentability. The implementation of
these new guidelines may cause the USPTO initially to reject some of our pending new gene and protein patent applications. There is no guarantee that the USPTO will approve them. We strive especially to gain issued patents for our commercially
important genes and proteins.



The patent positions of
pharmaceutical, biopharmaceutical and biotechnology companies, including us, are generally uncertain and involve complex legal and factual questions. Our patent applications may not protect our products, processes and technologies because of the
following reasons:



| |  |  | there is no guarantee that any of our pending patent applications will result in additional issued patents;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | we may develop additional proprietary technologies that are not patentable;
| | - |  | ---------------------------------------------------------------------------



| |  |  | there is no guarantee that any patents issued to us or our collaborative customers will provide a basis for commercially viable products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | there is no guarantee that any patents issued to us or our collaborative customers will provide us with any competitive advantages;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



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| |  |  | there is no guarantee that any patents issued to us or our collaborative customers will not be challenged or circumvented or invalidated by third parties; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | there is no guarantee that any patents issued to others will not have an adverse effect on our ability to do business.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



In addition, patent law relating to the scope of claims in the technology
fields in which we operate is still evolving. The degree of future protection for our proprietary rights is uncertain. Furthermore, there can be no assurance that others will not independently develop similar or alternative technologies, duplicate
any of our technologies, or, if patents are issued to us, design around the patented technologies developed by us. In addition, we could incur substantial costs in litigation if we are required to defend ourselves in patent suits brought by third
parties or if we initiate such suits.



The issuance of patents may not
provide us with sufficient protection.



We may not be able
to obtain further patents for our products, processes and technologies, or, if we are able to obtain further patents, these patents may not provide us with substantial protection or be commercially beneficial. The issuance of a patent is not
conclusive as to its validity or enforceability, nor does it provide the patent holder with freedom to operate without infringing the patent rights of others. A patent could be challenged by litigation and, if the outcome of such litigation were
adverse to the patent holder, competitors could be free to use the subject matter covered by the patent, or the patent holder may license the technology to others in settlement of such litigation. The invalidation of key patents owned by or licensed
to us or non-approval of pending patent applications could increase competition, and materially adversely affect our business, financial condition and results of operations. In addition, any application or exploitation of our technology could
infringe patents or proprietary rights of others and any licenses that we might need as a result of such infringement might not be available to us on commercially reasonable terms, if at all. Third parties have indicated to us that they believe we
may be required to obtain a license in order to perform certain processes that we use in the conduct of our business or in order to market potential drugs we have in development.



We cannot predict whether our or our competitors pending patent applications will result in the issuance of valid
patents. Litigation, which could result in substantial cost to us, also may be necessary to enforce our patent and proprietary rights and/or to determine the scope and validity of others proprietary rights. We may participate in interference
proceedings that may in the future be declared by the USPTO to determine priority of invention, which could result in substantial cost to us. The outcome of any such litigation or interference proceeding might not be favorable to us, and we might
not be able to obtain licenses to technology that we require or that, if obtainable, we could license such technology at a reasonable cost.



The public availability of genomic sequence information or other sequence information prior to the time we apply for patent protection on a corresponding
full-length or partial gene could adversely affect our ability to obtain patent protection with respect to such gene or gene sequences. In addition, certain other groups are attempting to rapidly identify and characterize genes through the use of
gene expression analysis and other technologies. To the extent any patents issue to other parties on such partial or full-length genes or uses for such genes, the risk increases that the sale of potential products, including therapeutics, or
processes developed by us or our collaborators may give rise to claims of patent infringement. Others may have filed and in the future are likely to file patent applications covering genes or gene products or antibodies against the gene products
that are similar or identical to our products. Any such patent application may have priority over our patent applications. Any legal action against us or our collaborators claiming damages and seeking to enjoin commercial activities relating to the
affected products and processes could, in addition to subjecting us to potential liability for damages, require us or our collaborators to obtain a license in order to continue to manufacture or market the affected products and processes or could
enjoin us from continuing to manufacture or market the affected products and processes. There can be no assurance that we or our collaborators would prevail in any such action or that any license required under any such patent would be made
available on commercially acceptable terms, if at all. We believe that there may be significant litigation in the industry regarding patent and other intellectual property rights. If we become involved in such litigation, it could consume a
substantial portion of our managerial and financial resources.



There is substantial uncertainty concerning the extent to which supportive data will be required for issuance of patents for human therapeutics. If data additional to that available to us is required, our ability to obtain patent protection
could be delayed or otherwise adversely affected. Although the USPTO issued new utility guidelines in 1995 that address the requirements for demonstrating utility for biotechnology inventions, particularly for inventions



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relating to human therapeutics, there can be no assurance that the USPTO examiners will follow such guidelines or that the USPTOs position will not
change with respect to what is required to establish utility for gene sequences and products and methods based on such sequences.



We cannot be certain that our security measures will protect our proprietary technologies.



We also rely upon trade secret protection for some of our confidential and proprietary information that is not subject
matter for which patent protection is being sought. We have developed a database of proprietary gene expression patterns and biological pathways which we update on an ongoing basis and which can be accessed over the Internet. We have taken security
measures to protect our proprietary technologies, processes, information systems and data and continue to explore ways to enhance such security. Such measures, however, may not provide adequate protection for our trade secrets or other proprietary
information. While we require employees, academic collaborators and consultants to enter into confidentiality and/or non-disclosure agreements where appropriate, any of the following could still occur:



| |  |  | proprietary information could be disclosed;
| | - |  | -------------------------------------------



| |  |  | others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may not be able to meaningfully protect our trade secrets.
| | - |  | -------------------------------------------------------------



We depend upon our ability to license technologies.



We may have to acquire or license certain components of our technologies or products from third parties. We may not be able to acquire from third parties
or develop new technologies, either alone or with others. Failure to license or otherwise acquire necessary technologies could materially adversely affect our business, financial condition and results of operations.



The 454 Life Sciences technology platform is in development and the initial stages of
commercialization.



The technology platform of 454, our
majority-owned subsidiary, is still in development and 454 has not had significant sales of its services or products. 454 may not be able to continue to successfully develop or commercialize the 454 technology platform. The success of
commercialization of the 454 technology platform depends on many factors, including:



| |  |  | the acceptance of 454s technology in the market place;
| | - |  | -------------------------------------------------------



| |  |  | technical performance of 454s platform in relation to existing technologies; and
| | - |  | ---------------------------------------------------------------------------------



| |  |  | 454s ability to obtain from suppliers key components for the manufacture of the 454 instrument and reagents.
| | - |  | -------------------------------------------------------------------------------------------------------------



454 is subject to competition from organizations that have developed or are developing
technologies and products to service 454s potential customers.



Many of the organizations competing with 454 potentially have greater capital resources, research and development staffs and facilities and marketing capabilities. 454s potential competitors include:



| |  |  | Applera Corporation - Applied Biosystems;
| | - |  | -----------------------------------------



| |  |  | Affymetrix, Inc.;
| | - |  | -----------------



| |  |  | GE Healthcare;
| | - |  | --------------



| |  |  | Perlegen Sciences, Inc.; and
| | - |  | ----------------------------



| |  |  | other companies recently formed or soon to be funded to develop whole genome sequencing technologies.
| | - |  | -----------------------------------------------------------------------------------------------------



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We believe that the future success of 454 will depend in large part on our ability to maintain a
competitive position in instruments for the high throughput nucleic acid sequencing field. Before we recover development expenses for our products or technologies, such products or technologies may become obsolete as a result of technological
developments by us or others. Our products could also be made obsolete by new technologies which are less expensive or more effective. We may not be able to make the enhancements to our technology necessary to compete successfully with newly
emerging technologies. A market for the high throughput nucleic acid sequencing field may not be sufficient to generate revenues significant enough for 454 to achieve profitability.



Patents may not provide sufficient protection for the 454 technology.



454s products and services are based on the combination of several complex technologies. 454 has developed some of
these technologies internally and has pursued patent protection in the U.S. and other countries for certain developments, improvements, and inventions it has developed that are incorporated into 454s products or that fall within its fields of
interest. Other of the technologies of interest to 454 are owned by third parties and are used by 454 under license. There are relatively few decided court cases interpreting the scope of patent claims in these technologies, and 454 believes that
its products and services do not infringe the technology covered by valid and enforceable patents. This belief could be successfully challenged by third parties. 454s patent applications may not protect its products, processes and technologies
because of the following reasons:



| |  |  | there is no guarantee that any of 454s pending patent applications will result in additional issued patents;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | 454 may develop additional proprietary technologies that are not patentable;
| | - |  | ----------------------------------------------------------------------------



| |  |  | there is no guarantee that any patents issued to 454 or its collaborative customers will provide a basis for commercially viable products;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | there is no guarantee that any patents issued to 454 or its collaborative customers will provide 454 with any competitive advantages;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | there is no guarantee that any patents issued to 454 or its collaborative customers will not be challenged or circumvented or invalidated by third parties; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | there is no guarantee that any patents issued to others will not have an adverse effect on 454s ability to do business.
| | - |  | ------------------------------------------------------------------------------------------------------------------------



454 could be subject to claims for infringing on patents of other intellectual property
rights.



In addition, patent law relating to the scope of
claims in the technology fields in which 454 operates is still evolving. Due to the fact that 454s business depends in large part on advancements made in genomic sequencing technology, there remains a constant risk of intellectual property
litigation affecting the company. The patent positions of organizations developing these products, services and technology, including 454, are generally uncertain and could involve complex legal and factual questions. The degree of future protection
for 454s proprietary rights is uncertain. Furthermore, there can be no assurance that others will not independently develop similar or alternative technologies, duplicate any of 454s technologies, or, if patents are issued to 454, design
around the patented technologies developed by 454. In addition, 454 could incur substantial costs in litigation if they are required to defend themselves in patent lawsuits brought by third parties, or if 454 initiates such lawsuits.



From time to time, third parties may assert that 454 is infringing patents
owned by such third parties. 454 will endeavor to settle such claims by mutual agreement on a satisfactory basis, which would result in withdrawal of the claim and/or result in the granting of licenses to 454. However, 454 cannot make any assurances
as to the outcome of any future claims.



We could be liable for any failure
to comply with hazardous product regulations.



Our
research and development activities involve the controlled use of hazardous materials and chemicals. We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of such materials and certain
waste products. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by federal, state and local laws and regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an accident, we could be held liable for any damages that result and any liability could exceed our resources.



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Risks Related to Our Financial Results



We have a history of operating losses and expect to incur losses in the future.



We have incurred losses since inception, principally as a result of research
and development and general and administrative expenses in support of our operations. We anticipate incurring additional losses over the next several years as we focus our resources on prioritizing, selecting and advancing our most promising drug
candidates. We may never be profitable or achieve significant revenues. For example, we experienced net losses of $90.3 million in 2004, $74.5 million in 2003 and $90.4 million in 2002, and as of March 31, 2005 had an accumulated deficit of $399.3
million.



Our quarterly operating results have fluctuated greatly and may
continue to do so.



Our operating results have fluctuated
on a quarterly basis. We expect that losses will continue to fluctuate from quarter to quarter and that these fluctuations may be substantial. Our results of operations are difficult to predict and may fluctuate significantly from period to period,
which may cause our stock price to decline and result in losses to investors. Some of the factors that could cause our operating results to fluctuate include:



| |  |  | changes in the demand for our services;
| | - |  | ---------------------------------------



| |  |  | the nature, pricing and timing of products and services provided to our collaborators;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | our ability to compete effectively in our therapeutic discovery and development efforts against competitors that have greater financial or other resources or drug candidates that
are in further stages of development;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | acquisition, licensing and other costs related to the expansion of our operations;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | losses and expenses related to our investments;
| | - |  | -----------------------------------------------



| |  |  | regulatory developments or changes in public perceptions relating to the use of genetic information and the diagnosis and treatment of disease based on genetic information;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | regulatory actions and changes related to the development of drugs;
| | - |  | -------------------------------------------------------------------



| |  |  | changes in intellectual property laws that affect our patent rights;
| | - |  | --------------------------------------------------------------------



| |  |  | payments of milestones, license fees or research payments under the terms of our external alliances and collaborations and our ability to monitor and enforce such payments; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing of intellectual property licenses that we may enter into.
| | - |  | --------------------------------------------------------------------



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We believe that quarterly comparisons of our financial results are not necessarily meaningful and should
not be relied upon as an indication of future performance. In addition, fluctuations in quarterly results could affect the market price of our common stock in a manner unrelated to our long-term operating performance.



The market price of our common stock is highly volatile.



The market price of our common stock has fluctuated widely and may continue
to do so. For example, during the first quarter of 2005, the closing sale price of our stock ranged from a high of $7.28 per share to a low of $3.80 per share. Many factors could cause the market price of our common stock to rise and fall. These
factors include:



| |  |  | variations in our quarterly operating results;
| | - |  | ----------------------------------------------



| |  |  | announcements of technological innovations, clinical results, or new products by us or our competitors;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | introduction of new products or new pricing policies by us or our competitors;
| | - |  | ------------------------------------------------------------------------------



| |  |  | acquisitions or strategic alliances by us or others in our industry;
| | - |  | --------------------------------------------------------------------



| |  |  | announcement by the government or other agencies regarding the economic health of the United States and the rest of the world;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | the hiring or departure of key personnel;
| | - |  | -----------------------------------------



| |  |  | changes in market valuations of companies within the biotechnology industry; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | changes in estimates of our performance or recommendations by financial analysts.
| | - |  | ---------------------------------------------------------------------------------



We have a large amount of debt and our debt service obligations may prevent us from taking actions that we would otherwise consider to be
in our best interests.



As of March 31, 2005, we had total
consolidated debt of $240.0 million; and for the year ended December 31, 2004, we had a deficiency of earnings available to cover fixed charges of $97.2 million. A variety of uncertainties and contingencies will affect our future performance, many
of which are beyond our control. We may not generate sufficient cash flow in the future to enable us to meet our anticipated fixed charges, including our debt service requirements with respect to our notes due in 2007 and in 2011. At March 31, 2005,
$240.0 million of those notes remained outstanding.



The
following table shows, as of March 31, 2005, the remaining aggregate amount of our interest payments due in each of the years listed (in millions):



|           |  |                   |     
|---------- |  | ----------------- | ----
|Year       |  | AggregateInterest
|2005       |  | $                 | 6.1 
|2006       |  |                   | 12.2
|2007       |  |                   | 8.3 
|2008       |  |                   | 4.4 
|2009       |  |                   | 4.4 
|Thereafter |  |                   | 6.6 
|           |  |                   |     
|Total      |  | $                 | 42.0
|           |  |                   |     



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Our substantial leverage could have significant negative consequences for our future operations,
including:



| |  |  | increasing our vulnerability to general adverse economic and industry conditions;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | limiting our ability to obtain additional financing;
| | - |  | ----------------------------------------------------



| |  |  | requiring the dedication of a substantial portion of our expected cash flow to service our indebtedness, thereby reducing the amount of our expected cash flow available for other
purposes, including working capital and capital expenditures;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; or
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | placing us at a possible competitive disadvantage compared to less leveraged competitors and competitors that have better access to capital resources.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



Our debt investments are impacted by the financial viability of the underlying companies.



We have a diversified portfolio of investments of which
$158.3 million at March 31, 2005 were invested in U.S. Treasuries and debt investments that are sponsored by the U.S. Government. Our corporate fixed-rate debt investments comply with our policy of investing in only investment-grade debt
instruments. The ability for the debt to be repaid upon maturity or to have a viable resale market is dependent, in part, on the financial success of the underlying company. Should the underlying company suffer significant financial difficulty, the
debt instrument could either be downgraded or, in the worst case, our investment could be worthless. This would result in our losing the cash value of the investment and incurring a charge to our statement of operations.



We may need to raise additional funding, which may not be available on favorable terms, if
at all.



We believe that we have sufficient capital to
satisfy our capital needs for at least the next twenty-four months. However, our future funding requirements will depend on many factors and we anticipate that, at some future point, we will need to raise additional capital to fund our business plan
and research and development efforts on a going-forward basis. To the extent that we need to obtain additional funding, the amount of additional capital we would need to raise would depend on many factors, including:



| |  |  | the number, breadth and progress of our research, product development and clinical programs;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | our ability to establish and maintain additional collaborations;
| | - |  | ----------------------------------------------------------------



| |  |  | the progress of our collaborators;
| | - |  | ----------------------------------



| |  |  | our costs incurred in enforcing and defending our patent claims and other intellectual property rights; and
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | the costs and timing of obtaining regulatory approvals for any of our products.
| | - |  | -------------------------------------------------------------------------------



We expect that we would raise any additional capital we require through public or private equity offerings, debt financings
or additional collaborations and licensing arrangements. We cannot be certain that in the future these



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sources of liquidity will be available when needed or that our actual cash requirements will not be greater than
anticipated. In appropriate strategic situations, we may seek financial assistance from other sources, including contributions by others to joint ventures and other collaborative or licensing arrangements for the development and testing of products
under development. If we raise additional capital by issuing equity securities, the issuance of such securities would result in ownership dilution to our shareholders. If we raise additional funds through collaborations and licensing arrangements,
we may be required to relinquish rights to certain of our technologies or product candidates, or to grant licenses on unfavorable terms. The relinquishing of rights or granting of licenses on unfavorable terms could materially adversely affect our
business, financial condition and results of operations. If adequate funds are not available, our business, financial condition and results of operations would be materially adversely affected. However, should we be unable to obtain future financing
either through the methods described above or through other means, we may be unable to meet the critical objective of our long-term business plan, which is to successfully develop and market pharmaceutical products. If we require additional capital
at a time when investment in biotechnology companies such as ours, or in the marketplace in general, is limited due to the then prevailing market or other conditions, we may not be able to raise such funds at the time that we desire or any time
thereafter.



Risks Related to Our Convertible Debt and Our Common Stock
into which Our Debt is Convertible



We have significant leverage as
a result of the issuances of our debt in 2000 and 2004.



In February 2000, in connection with the sale of our 6% convertible subordinated debentures due in 2007, we incurred $150.0 million of indebtedness. In February 2004, we repurchased $20.0 million of these debentures, for total consideration
of $20.0 million, plus accrued interest of $0.05 million to the date of repurchase. As a result of the remaining indebtedness of $130.0 million, our interest payment obligations amount to $7.8 million per year.



In February 2004, in connection with the sale of our 4% convertible
subordinated notes due in 2011, we incurred an additional $100.0 million of indebtedness. In addition, in March 2004, the initial purchasers exercised their option to purchase an additional $10.0 million of 4% convertible subordinated notes due in
2011, providing us with additional net proceeds of approximately $9.7 million. As a result of this indebtedness of $110.0 million, our interest payment obligations amount to $4.4 million per year. The degree to which we are leveraged could adversely
affect our ability to obtain further financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will depend upon
our future performance, which may be subject to the financial, business and other factors affecting our operations, many of which are beyond our control.



These notes, due in 2007 and in 2011, are effectively subordinated to all of our secured indebtedness and all indebtedness of our subsidiaries. These
notes are our general unsecured obligations and are not guaranteed by any of our subsidiaries. Accordingly, these notes are effectively subordinated to all of our current and future secured indebtedness to the extent of the assets securing the
indebtedness. Furthermore, our right to receive any distribution of assets of any subsidiary upon that subsidiarys liquidation, reorganization or otherwise, is subject to the prior claims of creditors of that subsidiary, except to the extent
we also are recognized as a creditor of that subsidiary. As a result, these notes are effectively subordinated to the claims of such creditors.



There are no restrictive covenants in our indentures relating to our ability to incur future indebtedness.



The indentures governing our notes due in 2007 and in 2011 do not contain
any financial or operating covenants or restrictions on the payment of dividends, the incurrence of indebtedness, transactions with affiliates, incurrence of liens or the issuance or repurchase of securities by us or any of our subsidiaries. We may
therefore incur additional debt, including secured indebtedness senior to these notes. As part of our growth strategy, we potentially may use proceeds from the 2004 offering to finance future acquisitions of complementary businesses or technologies,
which may cause us or our subsidiaries to incur significant indebtedness to which these notes would be subordinate.



These notes, due in 2007 and in 2011, are obligations exclusively of CuraGen Corporation. Our subsidiaries are separate and distinct legal entities. Our
subsidiaries have no obligation to pay any amounts due on these notes or to provide us with funds for our payment obligations, whether by dividends, distributions, loans or other payments. In addition, any payment of dividends, distributions, loans
or advances by our subsidiaries to us could be subject to statutory or contractual restrictions. Payments to us by our subsidiaries will also be contingent upon our subsidiaries earnings and business considerations.



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Our debt service obligations may adversely affect our cash flow.



A higher level of indebtedness increases the risk that we may default on our
debt obligations. We cannot be certain that we will be able to generate sufficient cash flow to pay the interest on our debt or that future working capital, borrowings or equity financing will be available to pay or refinance such debt. If we are
unable to generate sufficient cash flow to pay the interest on our debt, we may have to delay or curtail our research and development programs.



The level of our indebtedness among other things, could:



| |  |  | make it difficult for us to make payments on our notes;
| | - |  | -------------------------------------------------------



| |  |  | make it difficult for us to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements or other purposes;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | make us more vulnerable in the event of a downturn in our business.
| | - |  | -------------------------------------------------------------------



Our ability to repurchase notes, if required, with cash upon a change in control or fundamental change may be limited.



In certain circumstances involving a change in control, we may be required
to repurchase some or all of the notes due in 2007. In certain circumstances involving a fundamental change, we may be required to repurchase some or all of the notes due in 2011. We cannot be certain that we will have sufficient financial resources
at such time or would be able to arrange financing to pay the repurchase price of the notes. Our ability to repurchase the notes in such event may be limited by law, by the indenture and by such indebtedness and agreements as may be entered into,
replaced, supplemented or amended from time to time.



Securities we issue to
fund our operations could cause dilution to our shareholders ownership.



The conversion of our notes into shares of common stock will dilute the ownership interest of our current shareholders. We may decide to raise additional funds through a public or private debt or equity financing to
fund our operations. If we raise funds by issuing equity securities, the percentage ownership of current shareholders, including the ownership that holders of the notes would have upon conversion, will be reduced, and the new equity securities may
have rights prior to those of the common stock issuance upon conversion of the notes. We may not obtain sufficient financing on terms that are favorable to existing shareholders and us.



Item 3. Quantitative and Qualitative Disclosures About Market Risk



Our outstanding long-term liabilities as of March 31, 2005 consisted of $130.0 million of our 6% convertible subordinated debentures due February 2, 2007,
$110.0 million of our 4% convertible subordinated notes due February 15, 2011, and an accrued long-term liability of $1.0 million for the remaining future minimum payments under a license agreement (see Note 11 to our consolidated financial
statements included in our Annual Report on Form 10-K for the year ended December 31, 2004). As the debentures and notes bear interest at a fixed rate, our results of operations would not be affected by interest rate changes. As of March 31, 2005,
the market value of our $130.0 million 6% convertible subordinated debentures due 2007, based on quoted market prices, was estimated at $123.7 million, and the market value of our $110.0 million 4% convertible subordinated notes due 2011, based on
quoted market prices, was estimated at $82.2 million. Although future borrowings may bear interest at a floating rate, and our result of operations would therefore be affected by interest rate changes, at this point we do not anticipate any
significant future borrowings at floating interest rates, and therefore do not believe that a change of 100 basis points in interest rates would have a material effect on our financial condition.



There have been no other significant changes in our market risk compared to
the disclosures in Item 7a of our Annual Report on Form 10-K for the year ended December 31, 2004.



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Item 4. Controls and Procedures



(a) Evaluation of Disclosure Controls and Procedures



As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, the CEO and CFO have concluded that
our disclosure controls and procedures were adequate and effective.



(b) Changes in Internal Controls



There have
been no changes in our internal controls over financial reporting, identified in connection with the above-mentioned evaluation of such internal controls that occurred during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.



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##### Table of Contents

Part II - Other Information

Item 6. Exhibits



|             |  |                                                                                                                                                               
|------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 10.1 |  | Addendum dated February 1, 2005, to Employment Agreement, dated April 1, 2002, between the Registrant and Jonathan M. Rothberg                                
|             | 
|Exhibit 10.2 |  | Addendum dated February 1, 2005, to Employment Agreement, dated April 1, 2002, between the Registrant and Christopher K. McLeod                               
|             | 
|Exhibit 10.3 |  | Addendum dated February 1, 2005, to Employment Agreement, dated September 9, 2002, between the Registrant and Timothy M. Shannon                              
|             | 
|Exhibit 10.4 |  | Addendum dated February 1, 2005, to Employment Agreement, dated April 1, 2002, between the Registrant and David M. Wurzer                                     
|             | 
|Exhibit 10.5 |  | Separation agreement, dated February 10, 2005, by and between 454 Life Sciences Corporation and Richard F. Begley                                             
|             | 
|Exhibit 31.1 |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                           
|             | 
|Exhibit 31.2 |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                           
|             | 
|Exhibit 32   |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).



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SIGNATURES



Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                   |  |                     |  |                                                                                                                               
|------------------ |  | ------------------- |  | ------------------------------------------------------------------------------------------------------------------------------
|Dated: May 5, 2005 |  | CuraGen Corporation
|                   |  |                    
|                   |  | By:                 |  | /s/ Jonathan M. Rothberg, Ph.D.                                                                                               
|                   |  |                     |  | Jonathan M. Rothberg, Ph.D.                                                                                                   
|                   |  |                     |  | Chief Executive Officer, President and                                                                                        
|                   |  |                     |  | Chairman of the Board (principal executive officer of                                                                         
|                   |  |                     |  | the registrant)                                                                                                               
|                   |  |                    
|                   |  | By:                 |  | /s/ David M. Wurzer                                                                                                           
|                   |  |                     |  | David M. Wurzer                                                                                                               
|                   |  |                     |  | Executive Vice-President, Chief Financial Officer and Treasurer (principal financial and accounting officer of the registrant)



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CURAGEN CORPORATION



EXHIBIT
INDEX



|             |  |                                                                                                                                                               
|------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.          |  |                                                                                                                                                               
|Exhibit 10.1 |  | Addendum dated February 1, 2005, to Employment Agreement, dated April 1, 2002, between the Registrant and Jonathan M. Rothberg                                
|             | 
|Exhibit 10.2 |  | Addendum dated February 1, 2005, to Employment Agreement, dated April 1, 2002, between the Registrant and Christopher K. McLeod                               
|             | 
|Exhibit 10.3 |  | Addendum dated February 1, 2005, to Employment Agreement, dated September 9, 2002, between the Registrant and Timothy M. Shannon                              
|             | 
|Exhibit 10.4 |  | Addendum dated February 1, 2005, to Employment Agreement, dated April 1, 2002, between the Registrant and David M. Wurzer                                     
|             | 
|Exhibit 10.5 |  | Separation agreement, dated February 10, 2005, by and between 454 Life Sciences Corporation and Richard F. Begley                                             
|             | 
|Exhibit 31.1 |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                           
|             | 
|Exhibit 31.2 |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                           
|             | 
|Exhibit 32   |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).